Document of The World Bank FOR OFFICIAL USE ONLY Report No. 5053-AR STAFF APPRAISAL REPORT ARGENTINA C-AS UTILIZATION AND TECHNICAL ASSISTANCE May 29, 1985 Energy Department This document has a restricted distribution and may be used by reipients only in the performance of | |their official duties. Its eontents may not otherwise be disclosed without W;orid Bank authorization. CURRENCY EQUIVALENTS Currency Unit = Peso Argentino (Sa) US$1.00 = $a510 $al.00 = US$0.0020 (May 17, 1985) Note: Effective June 1, 1983, new pesos ("Pesos Argentinos") vere *zsued equal to 10,000 old pesos ("Pesos Ley"). FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES Bbl Barrels (42 US gallons, 159 liters) BD Barrels per Day BCF Billion Cubic Feet BCOE Barrels of Crude Oil Equivalent BTU British Thermal Unit COE Crude Oil Equivalent CFD Cubic Feet per Day LpG Liquified Petroleum Gas (propane/butane) m Cubic Meter ST Metric Ton SW Megawatt (10 KW) PSI Pounds per Square Inch TCF Trillion Cubic Feet TOE Tons of Oil Equivalent "M" preceding any unit indicates thousands. "MM" preceding any unit indicates millions. ABBREVIATIONS AND ACRONYMS CNG Compressed Natural Gas GdE Gas del Estado LPG Liquid Petroleum Gas (Propane, Butane) NGL Natural Gas Liquids (Propane, Butane and NaturaL Gasoline) YPF Yacimientos Petroliferos Fiscales Note: "Diesel Oil" in this Report is termed "Gas Oil" in Argentina. Diesel oil in Argentina is approximately equivalent to gas oil in the rest of the wor'ld. -3 - FOR OmCIL USIE ONLY ARGENTINA Gas Utilization and Technical Assistance Project Table of Contents Page INTRODUCTION ....................................... 9 I. THE ENERGY SECTOR .*.... .......... 12 Energy Resources and Supply .............................. . 12 Energy Demand ........... ............ 13 The Oil and Gas Supply .......... 0-0 ..................... 14 Energy Development Strategy .............................. 16 Institutional Framework ................................rk.. 17 The Role of the Private Sector .................. 18 Pricing ...... ................................ 20 Role of the Bank . ..................................... 24 II. THE BORROWER: YACIHIENTOS PETROLIFEROS FISCALES (YPF) ...... 26 Organization and Management .............................. 26 Operations .............. ................................ 27 Investment Program ............. . .. 29 Operating Results .................. 30 Commitment by Government of Argentina ......... ........... 33 Projections .............................................. 33 Projected Investment Program ............................. 34 Financial Coveannts ...................................... 35 Auditing and Reporting Requirements .... .................. 37 III. THE PROJECT ................................................. 38 Objectives .........*.................................... !! 38 Project Description ...... ................. ............... 38 Expansion of the Northern Gas Production and Transmission System ....... ................................ 39 Debottlenecking Subprojects and Enhanced Oil Recovery Pilot Pro,ects . . 42 Lujan de Cuyo Pipelines. ................................ 43 Compressed Natural Gas (CNG) ............................. 45 Technical Assistance to YPF ............................... 46 Technical Assistance to the Government .... ............... 49 Project Cost ........ . 49 Financing Plan and Disbursement ......................... 49 Project Status and Implementation ........................ 52 Procurement .......... . ....................... 54 Ecology and Safety ................................... 57 Reporting Requirements .................................. 58 This staff Appraisal Report (SAR) is based on an appraisal mission which visited Argentina late November/early December 1984 consisting of Messrs. J. W. Lowe (Mission Chief), F. Batzella, M. Farhandi (Gas Engineer), M. Klein (Energy Economist), N. Tin (Sr. Financial Analyst), J. Ehsani, and i. Simmons (Reservoir Engineer Consultant). TIis document Ibs a resticed distibution and may be used by reipients only in the perfomne of their offci dutiese Its cntens may not othdw be disdose witbout Wodd lank authonzato -4- Table of Contents (Cont'd) Page IV. JUSTIFICATION . ......................... ... . 58 Expansion of the Northern Transmission System............. 59 Gas Debottlenecking and Enhanced Oil Recovery ............ 59 Lujan de Cuyo Pipelines ............... 60 Compressed Natural Gas . .. ....... . . 60 Risks . ................60 V. AGREEMENTS AND RECOMMENDATIONS .. ..62 Agreements Reached.... . 62 Recommendation.. ................. 65 Annexes Annex I - Natural Gas in Argentina .. 66 Annex II - Reserves and Production Potential of the Northwestern Area of Argentina 76 Annex III - YPF - Organization Chart .79 Annex IV - Detailed Project Cost ...... ... . ........ .. s80 Annex V - Detail Description of the Campo Duran Gas Liquids Recovery Project .. . 83 Annex VI - Selected Debottlenecking and Enhanced Recovery Subprojects . .... . . 88 Annex VII - Technical Assistance to YPF and to the Government of Argentina ... 99 Annex VIII - Economic Analysis of Selected Project Components 102 Annex IX - Project File ..... .104 Annex X - YPF - Projected Financial Statements, 1985 ..... - 105 Tables Table 1 - Argentina: Energy Balance 1983 . ............. 111 Table 2 - Argentina: Share of Energy Sources in Primary Energy Production .... .............. o112 Table 3 - Argentina: Final Consumption of Energy by Sector...... 112 Table 4 - Argentina: Distribution of Proven Crude Petroleum Reserves by Provinces, 1971-82 ............ 113 Table 5 - Argentina: Distribution of Proven Reserves of of Natural Gas by Provinces, 1971-83 .... 114 Table 6 - Argentina: Reserves by Basin 1982........... 115 Table 7 - Argentina: Geophysical Exploration by YPF and Contractors, 1973-83o...o ............... 115 Table 8 - Argentina: Exploration Wells Drilled by YPF and Contractors, 1970-83... .................. 116 Table 9 - Argentina: Development Wells Drilled by YPF and and Contractors, 1970-83 ........... .116 Table 10 - Argentina: Growth Rate of Proven Reserves..... ....... 117 -5- Tables (Cont'd) Table 11 - Argentina: Share in Total Production of Producing Basinsewoe......................-..... .- .... 117 TabLe 12 - Argentina: Gas-Oil Ratios by Producing Basin........... 118 Table 13 - Argentina: Gas Flared Because of Lack of Gathering Facilities....oo..o.. .... 0 ............... . 118 Table 14 - Argentina: Secondary Oil Recovery by Administrative Province, 1982...e..... ............. ......... 119 Table 15 - Argentina: Crude Oil Production, Crude Imports, Refinery Processing; Refinery Output, Product Imports, Product Exports and Apparent Consumption, 1973-82.........ooo ..... 120 Table 16 - Argentina: Refinery Output Products, Imports and Exports, and Domestic Sales of Petroleum Products, 1973-82 ......................... ... 121 Table 17 - Argentina: Natural Gas Output and Use, 1973-82........o. 122 Table 18 - Argentina: Natural Gas Final Consumption, 1973-82...... 123 Table 19 - Argentina: Average Sales Price of Petroleum Products... 124 Table 20 - Argentina: Relative Price of Fuel Oil/Natural Cas...... 125 Table 21 - Argentina: International and Domestic Petroleum Products Prices ... ..... ....... ... 126 Table 22 - Argentina: International and Domestic Relative Price Structure ...... ...o.................. o.. ... 127 Table 23 - Argentina: Consumption of Major Fuels, 1960-1983....... 127 Table 24 - Argentina: Refining Capacity as of December 31, 1983... 128 Table 25 - Argentina: Major Pipelines for Crude Oil, Petroleum Products and Natural Gas ................... 129 World Bank Map No. 18903: Argentina - Gas System and Principal Hydrocarbon Basins. -6- ARGENTINA GAS UTILIZATION AND TECHNICAL ASSISTANCE PROJECT Loan and Project Summary Borrower: Yacimentos Petroliferos Fiscales (YPF) Guarantor: Government of Argentina Amount: US$180 miLlion equivalent Terms: Repayable in 15 years, including three years of grace at the standard variable interest rate. Project Description: The project comprises several components. The first is facilities for the recovery of liquids from natural gas produced from the Aquarague, Ramos and Acambuco fields in the north of the country near the Bolivian border at Campo Duran. These facilities will enhance the recovery of propane, butane, natural gasoline and (optionally) ethane, both from the existing flow of gas from these fields and from the expanded flow being made possible by increases to the capacity of the Northern Pipeline System being financed by the IDB. Second, provision is included for the financing of other gas projects of a debottlenecking character, as weLl as for pilot projects for enhanced oil recovery. A number of the debottlenecking projects have already been identified on a preliminary basis, and will be submitted for appraisal and approval. Ten sites for pilot projects also have been identified, work on which will be subject to detailed feasibility review. A third component comprises a crude supply pipeline and a products pipeline at the Lujan de Cuyo refinery associated with conversion facilities being financed under a prior Bank loan. Fourth, financing is provided for a pilot group of compressed natural gas (CNG) refilling stations for vehicular use. In addition, technical assistance is provided, both to YPF and to the Government of Argentina for energy planning purposes. Project Benefits and Risks: The Campo Duran facilities will extract approximiately 165,000 tons per year of LPG and 74,000 m of natural gasoline, as well as prevent flaring of 100 MMCFD of excess natural gas (by reinjection). The liquid products may be exported, and would generate an estimated US$70 million annually in foreign exchange. The export market for ethane is uncertain, and a project risk is that the market may not justify inclusion -7- of an ethane recovery unit, financing for which is included in the project. The unit would cost an estimated US$8.7 million, and if the market is established, could generate sales of over US$20 million. Installation is modular, however, and can be delayed until the market improves. Returns on the other gas projects will depend on the specific projects submitted, but benefits are expected - given their debottlenecking nature - to be high in relation to cost. The crude supply and product delivery pipelines for Lujan de Cuyo are also of a debottlenecking character with correspondingly high prospective returns. Benefits from the enhanced oil recovery pilot work will derive from field-wide applictions and while potentially significant, cannot be estimated quantitatively at this point. Risks in CNG should not be significant given the provisions for thorough feasibility work, close coordination with the private sector, adequate pricing incentives, and the limited scope of the pilot project. Estimated Costs: Local Foreign Total (USS Million) Expansion of the Northern Pipeline System Field Development: 71.5 9.4 80.9 Increase in Pipeline Capacity: 113.7 40.6 154.3 Campo Ouran Facilities: 63.1 47.8 110.9 Gas Debottlenecking and Enhanced Oil Recovery- 57.8 35.7 93.5 Lujan de Cuyo Pipelines: 106.6 26.1 132.7 Compressed Natural Gas: 4.7 7.9 12.6 Technical Assistance: 2.4 7.1 9.5 Total Base Cost: 419.8 174.6 594.4 Physical Contingencies: 39.3 16.2 55.5 Price Contingencies: 76.0 30.0 106.0 Total Project Cost: 535.0 220.8 755.8 Interest during Construction: 16.0 30.8 46.8 Total Financing Required: 551.0 251.6 802.6 Financing Plan Local Foreign Total IBRD: - 180.0 180.0 IDB: - 59.5 59.5 YPF/Private Producers 92.6 12.1 104.7 YPF/Government: 319.6 - 319.6 Gas del Estado/Government: 138.8 _ 138.8 Total: 551.0 251.6 802.6 Estimated Disbursements: IBRD FY: 1986 1987 1988 1989 Annual 25 55 60 40 Cumulative 25 80 140 180 -8- Rate of Return: - ith respect to Campo Duran, valuing natural gas at only depletion value, and assuming sale of 270,000 tons per year of ethane, the economic rate of return (ERR) is estimated to be 30 percent. The ERR excluding the ethane unit is 22 percent. Preliminary review of the gas debottlenecking projects indicates returns in excess of 80 percent and of the pipelines approximately 30 percent. The conversion of motor vehicles from liquid fuels to CNC has a high return, based on substitution of an abudant low- cost resource, natural gas, for high-value liquid petroleum fuels, and is estimated to have an ERR of over 50 percent. q - ARGENTINA GAS UTILIZATWMN AND TECHNICAL ASSISTANCE PROJECT INTRODUCTION i. Natural gas is one of Argentina's primary energy resources, and since the discovery and development of two significant new gas reservoirs (in the north near the Bolivian border and in the west at Lomo de la Lata) at the end of the last decade, the country's proved gas reserves have increased from approximately 15 to 25 trillion cubic feet. The latter figure represents over four billion barrels of crude oil equivalent, an amount of energy equal to almost twice the country's total proved oil reserves. Energy consumption, however, remains heavily weighted - by a factor of two-and-one-half times - towards oil. ii. Although Argentina is self-sufficient in the production of oiL, most of the country's oil fields are relatively old (petroleum was first discovered in Argentina in 1908) and production from them is declining relatively rapidly. Substantial new drilling is necessary to maintain oil production at present levels and to avoid imports. Most oil fields in Argentina contain significant volumes of associated gas. As a result the production of natural gas will increase in the future as the production of oil is maintained. iii. Unless adequate investment is made in facilities to produce, recover, transport and utilize natural gas, there is the prospect that significant amounts of this valuable energy resource may be wasted. Already this has become a substantial problem. Lack of adequate foreign exchange resources has prevented sufficient investment in gas infrastructure from being undertaken for several years. As of late 1984, of total production of approximately 1,865 million cubic feet per day (MMCFD), 130 MMCFD was flared because of lack of gathering or compression facilities. This represents more than 22,500 barrels of crude oil equivalent per day, or approximately five percent of Argentina's production and consumption of crude oil of approximately 480,000 barrels per day. iv. Investment in gas production infrastructure offers the opportunity to restructure energy supply and demand and reduce the risk of Argentina's becoming dependent on oil imports. The savings in foreign exchange expenditures and foreign exchange earnings relative to the foreign exchange component of investments in this area are particularly significant. Foreign exchange savings would result from lessened energy requirements, and foreign exchange earnings would result from fuel oil exported as a result of its use domestically being displaced by natural gas, as well as from the export of products separated from natural gas such as propane and butane. v. Beyond the important potential of natural gas in Argentina are other areas in the oil and gas sector where new initiatives can be promoted. Increased production of domestic crude oil must be met by increased exploration for new fields, but significant contributions to production can also be made by the application of enhanced oil recovery techniques in - 10 - existing fields. YPF, the Argentine state petroleum company and proposed borrower, has already implemented an extensive program of "water-flooding" of many reservoirs, a basic secondary recovery technique. Opportunities exist for further production from the use of more advanced recovery techniques. Additional petroleum may be recovered simply by identifying where in-fill drilling would be productive. This information is best ascertained by reservoir modeling and field testing on a pilot basis of production techniques. It is important that selection of sites for enhanced oil recovery techniques be made consistent with optimum development of Argentina's combined gas and oil resources. Site selection and process evaluation requires technical assistance from specialized international firms. Funds for this work have been allocated, together with funds for other gas utilization and transportation facilities which will remove bottlenecks in the hydrocarbon sector. vi The abundance of natural gas in Argentina, the relatively high level of the country's development, and the concentration of vehicle traffic in the major metropolitan areas - notably, Greater Buenos Aires - also provide the economic basis for use of compressed natural gas (CNG) for vehicular transport. Recognizing this, the Argentine authorities have drawn up a CNG utilization program, which is also being supported under this loan. Imported components for an initial group of CNG service stations would be financed. Conversion of vehicles and maintenance would be undertaken by the private sector. vii. As part of the Refinery Conversion Project financed by the Bank in 1981 (Loan 2032-AR), YPF agreed to construct a crude supply pipeline to the Lujan de Cuyo refinery from neighboring fields (present supply arrangements are by rail and truck) and to increase the capacity of a product pipeline from Lujan de Cuyo to the Greater Buenos Aires area. Lack of foreign exchange has prevented this work, which is important to successful completion of the Refinery Conversion Project, presently scheduled to begin coming onstream in 1987. The additional capability to process heavier liquids financed under 2032-AR will facilitate disposal and utilization of fuels substituted for by natural gas and is consistent with improvement in Argentina's integrated production, processing, refining and consumption system. viii. YPF (Yacimientos Petroliferos Fiscales) is responsible for the production of both oil and gas in Argentina. A separate state agency, Gas del Estado, is responsible for gas distribution. YPF's operations have been impaired by Argentina's lack of access to foreign credit; in addition, the company's financial situation has been gravely affected by a combination of low prices for its products net of fuel excise taxes collected by the Government and high foreign borrowings incurred on behalf of the Government during a period when the peso was devalued very rapidly. ix. In the late 70's, YPF had made progress in improving its operational efficiency and finances. The difficulties encountered by Argentina during the early 80's have, however, left the institution in a state of financial disarray. It will require several years to restructure YPF financially and to design and implement new financial control systems which will provide YPF and the Government with adequate tools to evaluate the company's priorities in detail and to assess results carefully. The proposed project includes provision for technical assistance to both YPF and the Government to speed up - 11 - this process. The Government recently made a commitment to inject the equivalent of approximately US$3.3 billion of fresh funds into YPF's equity over a period of time. This measure, coupled with a commitment to assure YPF adequate returns net of all taxes and royalties on net revalued fixed assets - covenants with respect to which are included in the proposed loan - should permit YPF to regain its financial viability and meet financial tests agreed between YPF and the Bank under a previous Bank loan. X. Three Bank loans in the oil and gas sector in Argentina have been made: US$27 million in 1980 to YPF primarily for seismic surveys and to appraise oil reserves in existing reservoirs; US$100 million in 1981 to the National Development Bank, BANADE, for onlending to private firms operating in the energy sector; and US$200 million, also in 1981, to YPF to reconfigure two major refineries. The first project is essentially complete. The BANADE loan has been partially disbursed and is being amended to include financing of working capital and service-related investments to facilitate future disbursements. The Refinery Conversion project is essentially on schedule. xi. The proposed loan to YPF will build on the close working relationship the Bank has established with the Argentine authorities in oil and gas sector issues. The recently elected civilian Government in Argentina is in the process of formulating new policies in the energy sector which in many ways follow Bank recommendations. This affords the Bank an opportunity to continue its dialogue with the Government at this critical juncture and to support initiatives by the Government not only with respect to YPF, but also on key policies, including pricing, improved use of natural gas resources, and increasing participation of the private sector in this critical sectcr. - 12 - PART I - THE ENERGY SECTOR Energy Resources and Supply 1.1 Argentina is endowed with substantial and diversified energy resources. In 1982 its hydro power potential (over 25 years) was estimated at 1,430 million tons of oil equivalent (NMTOE); proven and potential gas reserves at 2,080 MKTOE, and proven and potential oil reserves at 1,093 MMTOE. Potential coal reserves are even larger, estimated at 4,575 MMTOE, but these consist mainly of sub-bituminous coal with a high ash content remote from consumers and which cannot be recovered at competitive cost. These resources, together with estimated uranium reserves (but excluding relatively small potential sources of energy such as biomass and firewood), are summarized in Table 1.1 below. From the table it can be seen that the utilization of Argentina's energy resources differs significantly from their share in the country's total energy endowment: Table t.1 Estimated Energy Reserves and Consumption 1982 (Millions of Tons of Olt Equivalent - MWTOE) Proven Proven and Reserves Potential Reserves Utilization IUSTOE STE MrOE/yr % Hydropower 1,4301/ 51 1,430 15 4.0 9 Natural Gas 574 21 2,080 22 11.92 28 Oil 342 12 1,093 12 25.2 60 Coal 132 5 4,575 48 0.3 1 Uranium 302 11 302 3 0.9 2 2,780 100 9,480 100 42.3 100 1/ Hydroelectric potential over 25 years. 2/ Excludes flared gas. Source: Energy Secretariat, Government of Argentina. 1.2 Argentina's gas and oil reserves have recently been reviewed in the context of an overall "Gas Optimization Study" carried out by the Argentinian Energy Secretariat with the help of the Stone & Webster Engineering Corporation (U.S.) and financed under IBRD Loan 1880-AR (1980). The estimates for potential oil and gas reserves shown in Table 1.1 are based on a detailed review of/geologic structures identified in the six producing basins of the country_- 1/ Exploration for oil and gas has been conducted in the other twelve non-producing basins, but no discoveries have been made, and no reserve estimates for these basins are included. Basins are shown in IBRD Map No. 18902 attached at the end of this SAR. - 13 - 1.3 Argentina's energy resources are sufficient for the country to sustain energy self-sufficiency. In 1983, national energy production was equivalent to 99.3 percent of total national demand. The figure for 1976 was 84.7 percent. The country has become a net exporter of a modest amount of petroleum products and imports mainly gas as well as coal and electricity. 1.4 1972, Argentina concluded a twenty-year gas import contract with Bolivia.- Since the date of this original contract, domestic gas supplies have increased considerably beyond what was foreseen in the 1J01's. Nevertheless the Government of Argentina has continued to honor its commitments under this contract. The Government is now considering gas export projects to Chile, Brazil, Uruguay and Paraguay. In the coming decade some 175-200 MHCFD of gas could be exported, representing about 15 percent of present domestic consumption. Discussions with potential buyers of natural gas exports have been underway for some time. The possibility of building LNG and methanol plants for export has also been considered. Recent discussions with the Brazilian and Chilean authorities indicate progress in the prospects for integrating the use of gas on a regional basis. The Bank has encouraged the concept of an integrated gas transmission system in the region and, together with the IDB, is following these developments closely. 1.5 While coal has been observed and reported at about 250 surface locations in fourteen provinces and Tierra del Fuego, only about three percent of potential reserves have been proven, in the Austral Basin in Santa Cruz Province in the south of the country. About 1.1 million tons of -raw coal are produced in this area and transported by rail and ship over considerable distance to Buenos Aires. Most coal is used for power generation in thermal plants, particularly in San Nicholas to the northwest of Buenos Aires. Due to the high cost of production and transport, exploration and production of further coal reserves has been limited. The Bank is helping Argentina remedy this situation through its support of a basic coal reserves inventory, designed to establish investment priorities (Loan S-20). Energy Demand 1.6 During the 1970's, final energy consumption increased by approximately 2.5 percent per annum compared to an average GDP growth of 2.4 percent, in spite of slightly rising energy prices in real terms. This suggests that scope for energy conservation is still possible in Argentina. By way of comparison, in European countries, a one percent CDP growth is typically associated with only a 0.8 percent increase in energy consumption. In the 1961 Bank Refinery Conversion Loan, US$2 million was allocited to an audit of energy-saving opportunities in the industrial sector. 1.7 The pattern of energy production and consumption changed significantly late in the 1970's and particularly the early 1980's. As increased natural gas reserves have been discovered and developed, natural gas 11 Approximately 2.4 billion cubic meters of gas were imported from Bolivia in 1983, making gas one of Bolivia's principal exports. The project was supported by financing from the World Bank (Loan 635-B0). - 14 - has replaced fuel oil both in industry and electricity generation. The share of gas in final energy consumption increased from 15 percent in 1970 to approximately 24 percent in 1983, while the share of fuel oil fell from almost 20 percent to less than 8 percent. Electricity increased from 8.5 to 12 percent, while other petroleum products decreased approximately 2 percent. In electricity generation, gas, hydro and nuclear plants increased from 29 to approximately 63 percent, whereas fuel oil and diesel decreased from 66 to 31 percent of total generation. 1.8 There remains additional opportunity for the substitution of higher- value petroleum products by natural gas. In industry, gas could substitute further for fuel oil, which still accounts for approximately 18 percent of consumption. In the residential sector, naturaL gas could substitute for liquid petroleum gas, kerosene and fuel oil, which together account for 32 percent of consumption in this sector. Argentina also plans to use compressed natural gas (CNG) for the replacement of gasoline and diesel, which account for 98 percent of sectoral consumption ir the transport sector. In the power sector natural gas-fired power plants ccmpare favorably in economic terms with all other types of power generation and could be increased from the present 35 percent share of electricity generation. While these substitution options are economically justified, actual expansion of gas use is limited by the existing gas transmission infrastructure. Present capacity is approximately 1,500 HNCFD. By the end of the decade, expansion of this system to approximately 2,500 MMCFD is projected to be required. The Bank has begun discussions with Gas del Estado about supporting this investment effort. Oil and Gas Supply 1.9 Potential hydrocarbon-bearing areas in Argentina cover about 1.2 million km onshore and 600 000 million km2 offshore in eighteen sedimentary basins. 900,000 kmf of additional potential hydrocarbon-bearing areas are located in water deeper than 600 ft. Only six of the known sedimentary areas are producing basins: (a) The Northwestern basin (located in the provinces of Salta and Jujuy); (b) Cuyo (in northern Mendoza and San Juan); (c) Neuquen (in southern Mendoza, Neuquen, La Pampa and Rio Negro), (d) San Jorge (in Chubut and Santa Cruz); (e) The Southern (or Austral) basin (in Santa Cruz and Tierra del Fuego an (f) The Malvinas basin (mainly offshore Tierra del Fuego). 1.10 In the past fifteen years Argentina's oil reserves have remained virtually constant. New exploration efforts - which have remained about constant in recent years, as measured by the number of wells and total depth drilled - have, on average, just compensated for consumption. Gas reserves, however, increased dramatically in the mid 1970's, principally as a result of the discovery of the Lomo de la Lata field in the Neuquen basin, which now alone accounts for approximately 45 percent of all proven gas reserves in the country. Thes2 trends are sunmmarized in Table 1.2 below. - 15 - Table 1.2 Argentina: Sumary of Proved Oil and Gas Reserves Oi I Gas Year 3 IWbI 13 TCF MOOE 1970: 392 2,465 171 6 1,075 1976: 380 2,390 197 7 1 ,239 1983: 389 2,447 679 24 4,270 1.11 New reserves have mainly been discovered in the Northwest, Austral and Neuquen basins. Reserve balances have decreased in the San Jorge and Cuyana basins. Almost all natural gas presently produced is associated with oil. The new gas reserves consist of fields with significantly greater proportions of gas than previous discoveries. As production shifts towards these new fields, increasing amounts of gas will be produced together with oil. 1.12 The average production of gas relative to oil country-wide (the gas- oil ratio, or GOR) has increased from 120 (unit volume of gas per unit volume of oil) in 1922 to 609 in 1983, or by approximately 2.7 percent per annum. Between 1970 and 1983 the rate of increase in GOR was 4.7 percent per annum. In the years between 1980 and 1983 the rate of increase accelerated to 9.1 percent per annum. This growth of GOR is expected to continue. 1.13 During 1983 approximately 105 BCF (3 billion m3) of gas were flared. This was equivalent to an average of 290 MXCFD, 18 percent of total gas production and 6 percent of total primary energy production this year. By late 1984, 380 MMCFD were being flared. Of this volume, approximately _ 35 percent or 130 MMCFD was flared because of lack of gathering or compression facilities. The rest was flared because of operational reasons, such as high carbon dioxide or hydrogen sulfide content, low producing rates, low pressure, or the remoteness of the area. 1.14 The amount of gas flared in the future will depend not only on substitution possibilities in the economy, potential export markets and transmission infrastructure, but also on reservoir management techniques. Costs imposed on the economy by flaring gas can be minimized by proper joint management of oil and gas production from reservoirs. For example, production of high-cost oil fields with a low gas-oil ratio may be preferable to production of low-cost oil from fields which would produce large amounts of gas. Examples of such instances include oil production from offshore fields in the Austral basin which have a lower gas-oil ratio than onshore fields in the same basin, or enhanced recovery from fields in the Cuyana basin, which has a low gas-oil ratio. In general, fields with high GORs should be shut in and exploration should be concentrated on areas where the expected gas-oil ratios are low. 1.15 Secondary recovery accounted for 14 percent of Argentina's oil production in 1982. This activity is concentrated in more mature basins with low GORs. YPF has developed considerable experience with basic water-flooding recovery techniques. More complex enhanced recovery techniques may also be - 16 - appropriate in fields with low gas-oil ratios where primary and basic secondary recovery techniques have already been utilized. 1.16 Argentina's capacity to extract ethane and natural gas liquids (propane, butane, and natural gasoline) from natural gas is insufficient to accommodate the larger volumes of gas production foreseen. Ethane is used in petrochemical applications. Liquid petroleum gases (LPG) - propane and butane - may be exported; Argentina has been an exporter of LPG since 1982. In 1983, Argentina sold about 24,000 tons of LPG at an average price of US$302 per ton to neighboring countries and Japan. Natural gasoline from gas can be processed and used similar to gasoline refined from crude. Energy Development Strategy 1.17 Argentina's major objectives in the oil and gas sub-sector may be summarized as follows: (a) Implementation of an aggressive gas substitution program; (b) Encouragement of exploration for new resources both by YPF and private contractors; Cc) Better adaptation of output of petroleum products from the refinery systems to the pattern of domestic consumption; (d) Adjustment in the domestic prices of oil and gas products to assure economic utilization in relation to alternative energy sources to encourage energy conservation; and Ce) Supporting the financial viability of the public and private enterprises operating in the energy sector. 1.18 The future direction of energy use in the Argentinian economy depends importantly on the view the Government takes vis-a-vis potential oil and gas reserves. Proven reserves for oil are equivalent to only 14 years of present production. Proven gas reserves could last for over 40 years at today's production rates (although gas is likely to be produced more quickly as it is associated with oil). In the past the Government has promoted the use of hydropower and nuclear fuel in electricity generation. It has encouraged use of natural gas in industry, the residential sector and to a lesser degree in power generation. This strategy has properly been oriented towards conserving oil and making use of the country's more abundant gas resources. At the same time it will prepare the country for the transition from a self-sufficient oil producer to a net importer, assuming present petroleum resources begin to deplete towards the end of the century. 1.19 Based on potential hydrocarbon reserves, however Cutilizing figures from the Stone and Webster Gas Optimization Study), Argentina's oil reserves would last 43 years at present production levels and gas 142 years. However, as Argentina"s crude oil can be produced at a cost lower than the import price of oil, and as gas is expected to be produced in association with oil at increasing gas-oil ratios, large quantities of gas would have to be flared unless gas can be utilized as a substitute for other energy sources in the economy. The long-run marginal cost of gas would then reflect the fact that excess associated gas is expected to be produced as a by-product of oil production for at least 20 years. Based on these considerations, and allowing for additional gas consumption in the power sector as well as significant exports of gas to neighboring countries, the long-run marginal cost of gas is - 17 - estimated to be approximately US$1.10-1.40 per MCP.'/ At this economic cost natural gas is competitive with all other energy sources in Argentina. In particular, gas is competitive with hydropower and nuclear energy power generation. 1.20 An energy strategy taking more explicitly into account potential oil and gas reserves would promote vigorously the use of gas in the residential sector, industry, power generation and transport (as compressed natural gas) in order to minimize the use of petroleum products and make full use of gas which would otherwise be flared. Continued substitution appears to be justifiable in the power sector and in other sectors of the economy. 1.21 Calculations based on the energy balance of 1983 and using past trends in energy substitution and a 3.2 percent growth of total energy demand suggest that if a major gas substitution program were undertaken, Argentina's oil reserves would last until the year 2017; gas serves under such assumptions would still last until the year 2025 In this scenario gas would meet approximately 40 percent of final domestic energy demand and would account for 70 percent of electricity generation. This would avoid flaring and eliminate the need for significant investments in hydro and nuclear power plants. 1.22 The Secretariat of Energy is presently studying these issues. There is a need to evaluate Argentina's energy policy alternatives more closely in view of the country's recent rapid increase in gas reserves. The proposed loan includes specific provisions for assistance in such a planning effort. 1.23 A program to add cracking facilities to Argentina's refineries to increase the production of lighter products is presently being implemented. The Bank is supporting this under Loan 2032-AR (July 7, 1981). Increasee capability to process heavier portions of crude oil, which will result from the Refiner-, Conversion project, will complement the displacement of fuel oil which may be anticipated from increased use of natural gas supported under the proposed project. Institutional Framework 1.24 The Government's main energy policy-making and administrative body is the Energy Secretariat within the Ministry of Public Works. The Energy Secretariat is responsible for: (a) Overall energy planning; (b) Pricing policies; (c) Approval of exploration and production contracts for petroleum and gas (negotiated between YPF and foreign and local private companies); 1/ See Annex I for details on methodology by which this estimate is made. 2/ (These results are not directly comparable with those of the previous paragraphs, which are based upon present rates of consumption and do not allow for growth in consumption). See Annex I for details. - 18 - td) Policies for energy conservation; and (e) Development of new sources of energy. 1.25 The Energy Secretariat consists of four operational subsecretariats: Electricity, Fuels, Planning, and Relations with Enterprises. The latter two have only recently been created and are still in the process of being staffed and organized. The Subsecretariat of Electricity has direct cqntrol over the four largest of the nine major publicly owned power utilities- , and influence on the decisions of the provincially owned power distribution utilities through its control of an electricity fund. The Subsecretariat of Fuels is in charge of supervising the three state-owned entitites responsible for oil, gas and coal resources, respectively: Yacimientos Petroliferos Fiscales (YPF), Gas del Estado WGdE), and Yacimientos Carboniferos Fiscales (YCF). 1.26 As a result of frequent changes in administration, energy policies - particularly as regards energy prices - have been implemented in a discontinuous manner in the past. The Bank has emphasized the need for a comprehensive energy planning institution and consistent policies in this sector. The new Planning Subsecretariat should help achieve this objective. 1.27 Government responsibility in the oil and gas sector is exercised by two state-owned enterprises, YPF and Gas del Estado. YPF explores and produces oil and gas and markets oil and petroleum products. Gas del Estado transports and sells natural gas. Both firms use private sector enterprises as contractors. Gas del Estado has concluded several operating contracts with private firms. The largest contract, with a Dutch-led consortium, Cogasco, is for operation and maintenance of the Central-Western Gas Pipeline, capable of transporting approximately 350 MICFD. The Role of the Private Sector 1.28 Exploration and production of crude oil and natural gas have been undertaken by YPF since 1907. Since 1916, the private sector has also played an active role in this area and a number of domestic private companies have developed considerable experience. Approximately fifty of them, together with several foreign oil companies, are presently active. 1.29 The extent of oil and gas production accounted for by private firms reached relatively high levels (approximately one-third of total) in the early 70's and again after 1978; it has recently again declined somewhat. Recent production of oil is summarized in Table 1.3 belowi. Refining and marketing of petroleum products has also been shared between YPF and private companies, both Argentine and foreign. The private sector's share in refining amounts to 35 percent of total capacity. Among foreign firms, Exxon and Shell are active in exploration, refining and marketing; Total, Deminex, Occidental, and Union of Texas ir exploration; and Cities Service (Occidental) and Amoco in production. 1.30 YPF acts as the Government's agent for all oil and gas exploration and production in Argentina, except for a few old concessions granted to 1/ Agua y Energia Electrica, SEGBA, Hidronor and Yacyreta. - 19 - Table 1,3 ARGEINA: Production of Oil by Producer (Barrels per day) YPF Production Private Own Account Contracts Concessions Total 1960 122,800 (70%) 42,500 (24%) 9,700 (6%) 175,000 (100%) 1970 265,000 (68%) 124,500 (31%) 3,400 (1%) 392,900 (100%) 1980 316,500 (64%) 168,800 (34%) 6,900 (2%) 492,000 (100%) 1983 334,000 (68%) 146,400 (30%) 10,500 (2%) 490,900 (100%) private companies before 1958. YPF has a blanket concession on most of the country, including offshore. For specific areas and periods, YPF subcontracts exploration and production to other companies. YPF uses approximately 45 drilling crews of its own and subcontracts other work to private operators. 1.31 Thirty production contracts for production from known fields, and fifteen "risk" contracts for the exploration of new areas, are currently in effect between YPF and private companies. These contracts were awarded on the basis of international competitive bidding. They must be either Argentine companies (incorporated in Argentina and majority-owned by Argentine nationals), or consortia of companies with which an Argentine firm is associated. 1.32 Eighteen of the thirty production contracts now in force and all risk contracts have been awarded since 1976. Under all of these contracts, contractors commit themselves to minimum investment and/or production obligations. All oil produced is delivered to YPF, and payments to contractors are made by YPF. Per-barrel (or per-MCF) fees are negotiated as part of the bidding process. 1.33 Under production contracts, fees are denominated in pesos and adjustable for inflation. Under exploration contracts fees are payable partly in US dollars. They are initially set as a percentage of the international price of crude, and are adjustable according to formulae which take into account the peso:dollar exchange rate as well as domestic and international inflation. While some significant finds have been-announced under exploration contracts, notably by consortia headed by Total and by Shell, development of these fields has not yet begun, and no production is currently being obtained from areas under such contracts. All private production presently comes from production contracts or to a small extent from concessions granted before 1958. 1.34 In recent years, the Argentine peso has been devalued at a considerably faster rate than the rate of domestic inflation. As a result, the US dollar-equivalent value of remuneration under the production contracts deteriorated significantly. By mid-1983, the dollar-equivalent value of fees payable by YPP to private contractors for ongoing production had fallen to approximately US$5/bbl, or less than estimated direct lifting costs. Confronted with declining revenues and uncertainty regarding future earnings, new investment by private contractors stagnated and production declined. This - 20 - problem was less severe with respect to exploration contracts, which were partly indexed to international price levels, but exploration also slowed. 1.35 New terms for most production contracts were negotiated during early 1983 and ratified in June 1983. Under the renegotiated terms, the reference price of new production was raised on average to a level close to 60 percent of the international price of crude; fees for basic production (defined on the basis of standard field decline curves) were 50-60 percent lower than those for new production. The mechanism by which peso-denominated fees were adjusted for inflation was also standardized. 1.36 As part of these renegotiations a ceiling on crude prices was also lifted and the distinction between basic and new production abolished. The average pricq,per barrel of crude was lowered from US$14.60/Bbl to US$13.25/Bbl-i and gas prices raised from US$O.50/MCF to US$0.60/MCF. The negotiations were concluded in autumn 1984. The resulting prices for crude production, net of all taxes and royalties, are comparable to costs and price arrangements with private oil producers in other countries. 1.37 The Government has taken steps to encourage investment by Argentine and foreign companies in oil and gas exploration offshore. In particular, support for efforts by a consortium led by a foreign oil company to secure project financing for a development project offshore Tierra del Fuego has been discussed. Financing for the project will likely be possible only if YPF's payment for future production, denominated partly in US dollars, were assured by some form of supplementary guarantee. 1.38 The Government of Argentina's present policy with respect to the private sector as expressed to the Bank is that private companies currently operating according to production contracts with YPF will continue working and that new acreage will be offered for bids. The Gcovernment has also stated that it would review its legislation with a view to attracting further private interest, particularly for exploration ventures. The Colombian association contract system, where private companies bear all the risk of exploration and share the cost and benefits of successful exploration with the state oil company, is being considered as a model in this context. The Bank has maintained ongoing discussions with the Government with the objective of identifying appropriate measures to encourage greater private participation in oil and gas exploration and development in the future. Pricing 1.39 In Argentina, prices of crude oil, natural gas and petroleum products are all Government-controlled, with the exception of lubricants, jet fuel, asphalt, and certain semi-finished products. During certain periods, notably 1982, the Government allowed petroleum product retail prices to decrease substantially in real terms (both including and excluding taxes), ostensibly to control inflation. For most products, adjustments since have resulted in 1/ Excluding Amoco and Cities Service, for which lower prices have been negotiated based on lower production costs. The overall average including Amoco and Cities Service (Occidental) is approximately US$10/bbl. - 21 - present retail price leveLs comparable to end-1981. Diesel is one important exception to this trend. Increases in the level of taxes hiad until recently resulted in lower prices net of taxes on almost all products. During the 1982 South Atlantic crisis, the Government used excise taxes to mobilize resources, a policy which was continued thereafter. In particular, taxes on premium and regular gasoline were increased substantially. During recent months, the Government has made a marked effort both to increase prices net of taxes to YPF and to increase prices of middle distillates (e.g. diesel) and heavier distillates (e.g. fuel oiL) at the retail level, improving the structure of relative product prices. These developments are summarized in Table 1.4 below. Table 1.4 ARGFNTINA: Domestic Petroleum Product Prices (USS Equivalent per Gallon) Super Gasoline Regular Gasoline Diesel Fuel Oil R T N R T N R T N R T N Dec 31, 1981 1.85 1.15 0.70 1.53 0.90 0.63 1.15 0.56 0.59 0.43 0.08 0.35 Dec 31, 1982 0.93 0.56 0.35 0.84 0.52 0.32 0.51 0.22 0.29 0.24 0.06 0.18 Dec 31, 1983 1.26 0.65 0.61 1.14 0.59 0.55 0.75 0.24 0.51 0.52 0.27 0.25 Dec 31, 1984 2.00 1.44 0.56 1.83 1.30 0.53 0.70 0.19 0.51 0.42 0.20 0.22 May 17, 1985 1.99 1.27 0.72 1.83 1.14 0.69 0.82 0.14 0.68 0.46 0.12 0.34 Note: R = Retail price including excise taxes. T = Excise taxes. N = Net prices excluding excise taxes ("Retention" prices). USS conversions at official exchange rate. 1.40 In recent years YPF has not been able to cover its costs based on revenues to the company net of all taxes and royalty payments. It is important that policy with respect to the pricing of petroleum products not only assure economic use of these resources by proper pricing at the retail level, both in absolute and relative terms, but also assure the financial viability of YPF by appropriate levels of taxation (principally in terms of fuel excise taxes). 1.41 Price incentives to consumers between the price of natural gas and its substitutes should be consistent with their relative economic costs. This will help promote the utilization of gas in the economy. Current price relationship are summmarized in Table 1.5 (next page). As shown in the table, natural gas is presently priced well below the price of its substitutes. The price differentials between natural gas and middle distillates as well as between gas and LPG are sufficient to promote gas utilization in the residential sector. The price differential between gas and fuel oil is also sufficient to encourage substitution of gas for fuel oil in industry. Further gas utilization in these sectors is primarily constrained by the lack of transmission infrastructure. 1.42 In the case of fuel oil, prices at the retail level in relation to economic cost as represented by the FOB-equivalent value were typicalLy of the - 22 - order of 75 percent, as indicated in Table 1.5, based on year-end 1984 values. Recent increases in fuel oil prices, coupled with decreases in world- market prices, have brought this relationship to approximately 90 percent. In conjunction with the proposed loan the Government has covenanted that fuel oil prices would be brought up to 33 percent of the price of regular gasoline by September 1986 and to 40 percent by end-1987. As of May 1985, fuel oil was 24 percent of regular gasoline prices. Table 1.5 Argentina: Comparison of Energy Prices (in USSA46MTU) January 1985 December 1984 Domestic Price Economic Relative Domestic Relative as % of Cost 1/ Value Retail Price Value Economic Cost Premium Gasoline: 5.72 107 16,05 108 281 Regular Gasoline: 5.33 100 14.92 100 280 Diesel: 4.59 94 5.11 34 102 Fuel Oil: 3.84 72 2.84 19 74 LPG: 5.06 96 7.38 53 146 Natural Gas 1.10-1.40 21-26 - Residential Use: 1.33 a 95-121 - Other Uses: 1.77 41 12 126-161 Coal (Domestic): 3.25 ' 61 1.50 4Y 11 46 (Imported): 2.46 Y 46 61 1/ Economic cost is FOB for exported goods: CIF for inported goods. 2/ Cost of locally produced coal at Rio Turbio in 1983. 3/ 1983 figures. 4/ October 1984 figures. Note: Prices are based on Buenos Aires market. Source: Platt's Oilgram: Energy Secretariat; YPF; Gas del Estado; YCF. 1.43 Diesel is presently priced at somewhat above international price equivalence. This avoids distortions in input costs in agriculture and industry. In the transport sector diesel competes mainly with gasoline. The price of diesel relative to gasoline has dropped from 75 percent (of the price of regular gasoline) in 1981 to 34 percent as of end-1984; it is presently 45 percent. The share of gasoline in consumption in the transportation sector has remained approximately constant. This has been due to restrictions on the availability of diesel-powered cars for privete transport. In February 1985 the Government announced its intention to raise the price of diesel fuel, together with the average prices of other middle and heavey distillates in real terms by 2 percent per month over an 18-month period. Diesel prices have increased from approximately US$0.70/gallon equivalent to US$0.82/gallon from end-1984 to May 1985, and are presently approximately 45 percent of the price of regular gasoline. Continued increases in accordance with this policy would bring diesel prices to 55 percent of the present price of regular gasoline by fall of 1986. In conjunction with the proposed loan the Government has covenanted that diesel prices would be at least 53 percent of - 23 - the price of regular gasoline as of September 1986 and be brought up to 70 percent of the price of regular gasoline by end-1987. 1.44 The Government has announced its intention to set the price of CNG at 45 percent of the price of premium gasoline, (based on present prices, approximately US$0.90 per gallon equivalent). This would assure the necessary incentive to convert gasoline engines. When diesel engines are to be converted, the price of diesel would have to be raised further, to approximately US$1.20 per gallon to encourage substitution. Alternatively, differential prices may have to be adopted for CNG dispensed to light and heavy vehicles. Any loss of excise taxes from present excise taxes on gasoline would be limited in the initial years of the conversion program due to the low number of vehicles to be converted compared to the total fleet in Argentina. Because the cost of CNG is less thar. the cost of gasoline, there is scope for comparable revenue-raising from CNG as the market for CNG use deveLops. 1.45 The pricing policies described above would establish differentials between the price of natural gas and between petroleum products sufficient to provide appropriate incentives for interfuel substitution based on increased use of natural gas. The price of natural gas to the consumer (approximately US$1.60 per MCF on average) is presently set at slightly above its estimated economic cost. In conjunction with the proposed loan, the Government of Argentina has agreed to exchange views with the Bank on energy pricing policy on an annual basis. 1.46 Gas del Estado (GdE) purchases gas from YPF for approximately US$0.78 per MCF and for approximately US$4.50 per MCF from Bolivia. This results in an average cost to GdE of approximately US$1.40 per MCF. GdE should pay a price sufficient to cover YPF's costs of gas giLahering and treatment, which is estimated to be approximately US$0.10 per MCF _ . The largest element in the existing gas purchase price paid by Gas del Estado to YPF is royalties on gas production; these amount to about two-thirds of the total purchase price. The royalties are based on a hypothetical wellhead price for gas reaching the equivalent of the international price of fuel oil by 1987. Royalties constitute important income for the provincial governments in Argentina. 1.47 The Government has indicated its willingness to assume payment of the difference between the price of Bolivian gas and gas produced by YPF. Based on this commitment, GdE would pay an average of US$0.78 per MCF for gas acquired either from YPP or Bolivia. The Government has also indicated a willingness to assume substantial parts of GdE's dollar-denominated debt. Nevertheless, based on US$0.75 per MCF acqusition costs and estimates of actual transmission and distribution costs manned by Gas del Estado, additional steps are necessary to assure Gas del Estado's financial viability. 1/ This excludes YPF's costs incurred for LPG extraction. (LPG would be extracted from the gas stream in any event, given its economic value of over US$200 per ton). - 24 - 1.48 Preliminary review suggests that Gas del Estado's total costs could be approximately covered if the retail sale price of natural gas were increased to the range of US$2.00-2.50 per MCF. At such a level gas would still be competitive with fuel oil. This applies in particular to the price of gas in the residential sector, where a relatively low consumer price prevails at present. The Interamerican Development Bank is presently discussing these issues with the Government of Argentina in the context of a loan to GdE to increase the capacity of the Northern Gas Pipeline System. IDB has requested covenants of Gas del Estado and the Government of Argentina which should have the effect of resolving there gas price issues. The retail price of natural gas would be an issue the Bank would review in detail in conjunction with further operations in the gas sector in the future. Role of the Bank 1.49 The Bank has approved three loans to the Government of Argentina in the oil and gas sector. A first loan (1880-AR, June 24, 1980) for US$27 million financed a seismic exploration program of approximately 1,000 line-km in the Northwestern basin, a survey of information available on petrolerm and gas deposits, and the Optimization Study on the use of natural gas referred to elsewhere in this report. The survey work focussed on assessing proven secondary recovery oil reserves in about nine reservoirs in various basins, proven reserves in newly discovered oil and gas reservoirs in the Northwestern basin, and reservoir estimates in selected other basins. This work has been completed satisfactorily, and the results have helped provide the basis of YPF's current exploration strategy. 1.50 A second loan (2031-AR, July 7, 1981) for US$100 million, provided long-term financing for exploration and production of petroleum and gas resources by private sector firms through the National Development Bank, BANADE. The loan included a component to develop BANADE's institutional capacity to identify, appraise and supervise oil and gas subprojects. The institution-building component of this loan has largely been achieved. Approximately US$18 million has been committed and BANADE management indicates that processing of several more subprojects representing approximately US$50 million is expected shortly. Disbursement of the BANADE credit has been slower than originally foreseen because of uncertainties associated with renegotiation of the exploration and production contracts, now largely resolved, and the reluctance of domestic energy companies, the revenues of which are peso-dominated, to assume the perceived exchange risk associated with dollar borrowing. Amendments to the BANADE loan are presently being prepared to provide for interim working capital financing and assumption of the foreign exchange risk by the Central Bank. This should resuLt in more rapid commitment of the balance of this loan. 1.51 A third loan (2032-AR, July 7, 1981), for US$200 million, financed the installation of secondary processing facilities at YPF's two existing refineries at La Plata and Lujan de Cuyo to increase the production of lighter distillates. The project includes a plant operations improvement program, a financial management improvement program, a training program for YPF personnel and an industrial energy audit. Current estimates of the conversion component are US$715 million compared to US$820 million at appraisal as a result of generally lower-than-anticipated equipment costs. Foreign exchange cost estimates have been reduced from US$410 million to US$240 million as a result - 25 - of the increased use of local supplies. The plant operations improvement program has been progressing satisfactorily. The financial management program is being restructured to reflect changes in YPF's financial situation and management structure, and would be integrated with the technical assistance included in the proposed loan. 1.52 The Bank's role to date in the oil and gas sector has been oriented towards supporting efforts by the Government to ensure a more balanced development of the country's hydrocarbon resources, both in terms of natural gas relative to oil and in terms of public versus private sector investment. This has been achieved by supporting efforts by the Government to improve knowledge of Argentina's existing reserves, defining a better strategy for utilization of resources through the Refinery Conversion Program and the Gas Optimization Study, and by providing financing for private domestic energj firms. These projects have proceeded satisfactorily, notwithstanding some delays and financial difficulties, most of which have been associated with the severe recession and economic uncertainties in Argentina. 1.53 The proposed project would serve as a basis for continuing the ongoing energy policy dialogue with the present authorities, particularly concerning energy sector planning; petroleum product pricing; gas utilization, including export possibilities to neighboring countries; and encouragement of the contribution of the private sector to oil and gas development. 1.54 The Bank strongly supports the integrated development of Argentina's energy resources (oil, gas and hydropower), and has been assisting both the Central Government and a number of pubLic enterprises in gathering and interpreting the information required to design an appropriate mix of primary energy which would reflect the relative importance of reserves and would take into account the strong links that exist between oil and gas production. So far the Bank has been concerned with resources assessment (Loan 1880-AR), _- refineries configuration (Loan 2032-AR) and balance between public and private sector investment. (Loan 2031-AR). 1.55 The proposed project addresses the issue of petroleum pricing policies which is another important element of the Government strategy for development of the sector, and establishes the basis for an in-depth review of the sector investment program with the Energy Secretariat. This review will be carried out as part of a forthcoming Public Sector Investment Review mission and will be expanded as part of the technical assistance funded to the Government under this loan. 1.56 The Bank's role in the gas sector is likely to extend, in the future, to support for expansion of the domestic gas infrastructure and to gas export possibilities from Argentina to neighboring countries. The Bank may be able to assist in bringing to agreement the Governments of Argentina and those of Chile and Brazil with respect to the realization of two separate and important potential pipeline projects to export Argentine gas to these countries. These projects could be of substantial mutual benefit to the importing countries, and increase regional cooperation in the future. This could form the basis of an interconnected gas supply network of the same nature as the systems which have been built in Europe over the past twenty years. - 26 - 1.57 The Bank has participated in important policy decisions in the oil and gas sector over recent years. Revisions to existing contractual arrangements between YPF and private companies for oil and gas exploration and development were eventually reached partly as a result of discussions with the Bank, which emphasized the importance of the contracts in the country's petroleum sector development. The Bank also participated in discussions leading to the Government's decision, in 1983, to support YPF by assuming responsibility for much of YPF's outstanding foreign debt. This is the basis of YPF's financial recovery plan and, together with appropriate price policies, should enable the company to return to financial viability (see further discussion under Part II, following, of this Staff Appraisal Report). The Government has continued to request Bank assistance in addressing operational and planning issues in the energy sector. 1.58 The proposed loan is designed to support efforts by YPF to improve its overall management of the production of oil and gas. Selected subprojects with high and quick returns which optimize reservoir management and the mix between oil and gas supply will be supported. Technical assistance components would strengthen YPF's accounting, evaluation, and control systems. On the basis of such systems, it should be possible to increase the efficiency with which YPF is able to manage its operations. Review of the organi-ation and cost-effectiveness of YPF's operations would be included under these components. PART II - THE BORROWER: YACIMIENTOS PETROLIFEROS FISCALES (YPF) 2.1 YPF is a state-owned petroleum company organized under the Secretariat of Energy in the Ministry of Public Works. It is the largest enterprise in Argentina and one of the largest oil companies in Latin America. In 1983-84, YPF produced approximately 65 percent of Argentina's output of crude oil and, working together with private-sector production firms which produce oil under contract to YPF, oversaw production of most of the remaining 35 percent. Tax revenues from YPF's sales provide approximately 15 percent of the Government's total revenues. YPF is the largest single employer in the country; it has approximately 33,000 employees. 2.2 YPF's responsibilities are to produce sufficient crude oil and natural gas to allow Argentina to avoid energy imports, and to refine, process and market petroleum products to supply domestic demand. By these criteria, the company has been largely successful. Imports have been limited and the country has been essentially self-sufficient in production. Organization and Management 2.3 YPF was established in 1922 as a Government department (a predecessor organization had begun operations in 1907). In 1977, it was separated from the Ministry of Public Works and converted to a state corporation. The main objective of the change in status of YPF was to encourage it to function more efficiently without being dependent on Government budget support. 2.4 The President and Vice President of the company are also Directors; others of the Directors also hold operating positions in the company. The - 27 - Directors are appointed by the Government for a term of three years and are eligible for reappointment without limitation. The company's formal organization structure is attached as Annex III. 2.5 YPF operates through a headquarters in Buenos Aires and several regional administrations. There are eight Departments of which two, Finance and Industrial Relations, report to an Executive Committee headed by the Vice President, and the remaining six (Research and Development, Production, Transport, Industrialization, Sales, and Commercial Operations) report to the General Manager of Operations, who is responsible directly to the President. The General Manager of Operations is, in effect, the Chief Operating Officer. 2.6 The number of employees at YPF declined from 51,700 in 1976 to 34,800 in 1980 and 32,800 by end-1983. The initial part of these reductions reflects YPF's returning to private ownership a network of retail service stations. The professional staff of YPF have a reputation for dedication and competence known in the industry. On occasion, however, morale has been eroded by insufficient adjustment of YPF's salary structure for inflation. During 1981 and 1982, salaries were periodically frozen, with the result that their real value deteriorated significantly. Salary adjustments made during 1983 and 1984 have corrected some of these problems.-' 2.7 According to the Law of State Corporations, YPF cannot be declared bankrupt and can onLy be dissolved by lav. The company's annual budget must be approved by the cabinet, and its financial statements are audited annually by the Sindicatura General de Empresas Publicas, the Government agency responsible for public corporations. Operations 2.8 YPF has been able to continue physical operations with relative continuity, notwithstanding the great impact upon the company's financial situation of events since 1980. Lack of foreign exchange has impaired YPF's ability to import key parts and has required use of makeshift substitutes at the expense of certain operating efficiencies. Similarly, lack of adequate cash flow has forced the firm to cut all but essential expenditures. In response to the latter problem portions of the fuel excise taxes collected on behalf of the federal Government have on occasion been withheld by the company. 2.9 Exploration and development of oil and gas in Argentina is undertaken by YPF both on its own account and with the private sector on a contractual basis. ApproximateLy 70 percent of exploration for oil and gas in Argentina and 60 percent of development drilling is done by YPF. The balance is done by private sector firms under contract to YPF. Details of these efforts are shown in Annex Tables 7, 8 and 9, attached. I/ Indication of the indexed value of YPF salaries is provided at the bottom of Table 2.3, page 31. - 28 - 2.10 The amount of new reserves added each year as a result of the combined exploration effort of YPF and the private sector has approximately equaled production, with the result that total reserves of crude have remained relatively constant. However, the reserves-to-production ratio has declined from levels over 17 years to recent levels under 14. 2.11 Annual production of natural gas by YPF has increased significantly, from 285 billion cubic feet (BCF) in 1975 to 400 BCF in 1980 and 428 BCF in 1982. Natural gas is almost entirely associated with crude oil. Detailed reserves and production statistics regarding natural gas are shown in Annex Tables 5 and 17, respectively. 2.12 YPF operates over 4,600 kilometers of pipelines. 1,706 km are crude oil lines and 2,951 km are petroleum product lines. The most important crude lines are from fields in Neuquen to the west connecting petrochemical installations located at Bahia Blanca south of Buenos Aires; the most important petroleum product lines extend from Campo Duran in the north to the port of San Lorenzo north of Buenos Aires. Details of pipeline operations are shown in Annex Table 25. 2.13 YPF has a refining capacity of 460,000 barrels per day, or approximately 65 percent of Argentine's total refining capacity. The balance of refining is done by private companies, notably Esso and Shell. Details of YPF's refining capacity and those of the private sector refineries in the country are shown in Annex Tables 16 and 24. 2.14 In January 1980, YPF appointed Total, a French petroleum company, to review the operations of its La Plata refinery, the country's largest (near Buenos Aires), and to recommend measures for modernizing and increasing the efficiency of operations there. Following submission of a report by Total in September 1980, YPF developed, with Total's assistance, a Plant Operations Improvement Program for the La Plata refinery as well as for YPF's second largest facility at Lujan de Cuyo in Mendoza. Implementation of this program is presently being financed with Bank funds under the Refineries Conversion Loan. Under the Bank loan, funds were also provided for improvements in financial management systems at YPF's refineries. 2.15 In general, the issues confronted by YPF are: (a) Inadequate revenues net of fuel excise taxes (or "retention income"), other taxes and royalities; (b) Loss of its equity base; (c) Inadequate financial management and control systems; (d) Need for improved evaluation and ordering of investment priorities; and (e) Difficulty in planning beyond a short-term horizon. 2.16 [ost of these problems can be correlated directly with the financial and economic problems of the country in recent years. Specific components of the proposed loan focus on each of these areas. Price and taxation covenants should assure YPF an adequate cash flow, and implementation of capital support commitment by the Government (described in more detail below) should restore YPF's equity base. Specific technical assistance would implement improved financial controls and permit improved planning cap&bility. Review of YPF's - 29 - investment priorities would be undertaken as part of a technical assistance component to YPF; this work would be coordinated with review of investment planning in the sector to be undertaken by the Energy Secretariat, also supported by the Bank. YPF's ongoing investment program and plans would be reviewed periodically with the Bank as part of the proposed project. Investment Program 2.17 The bulk of YPF's investm st program is allocated to exploration for and production of crude petroleum.- In 1983 these amounts represented US$710 million, or 87X of total investment of US$820 million. Physical exploration and production activities by YPF (and prKvate contractors) during 1982 and 1983 are summarized in Table 2.1 below.PvDetails are shown in Annex Tables 8 and 9. Table 2.1 ARGENTINA: Exploration and Development 1982-83 1982 1983 YPF Cont's Total YPF Cant's Total Exploration: Seismic (Line-km) 24,707 19,680 Wells (Number) 63 15 78 83 34 11' Ku's Drilled 161 40 201 209 93 302 Development: Wells (Number) 526 210 736 475 274 749 Km's (Drilled) 986 524 1,510 908 647 1,555 Source: Annex Tables 7-9. 2.18 The investment program in exploration and production originally planned by YPF for 1984 and discussed with the World Bank was a relatively ambitious one. YPF had planned to make up for lower rates of investment in development drilling which it had undertaken in 1983 relative to 1982. While development drilling by the private sector increased for 1983, uncertainties concerning renegotiation of the contracts between the private producers and the Government during 1984 indicated at that time that investment in this area by private contractors might decline significantly. 2.19 YPF's total investment program for 1984 is estimated at US$900 million. While greater than the amount invested during 1983, this amount is less than the amount planned by YPF one year ago, reflecting the satisfactory resolution of the contracts issue with private sector firms. There is the prospect, now that the operating contracts for private sector firms have been successfully renegotiated, that investment by the private sector will 1/ The investment budget includes all funds allocated for drilling. As is common industry practice, funds spent on successful weLls are capitalized and depreciated; funds spent on unsuccessful wells are expensed and written off. 21 (Final data for 1984 are not yet available). - 30 - increase. However, the ability of many Argentine energy companies to invest has been affected by the country's severe economic recession. 2.20 For YPF like any oil company there is flexibility in the amounts which may be spent in exploration and production in any given year. It may be considered that in an environment of severely limited resources, such expenditures might presently be curtailed. In the case of Argentina, however, a continuous flow of new investment in exploration and development drilling is necessary to prevent rapid declines in the level of crude production. Argentina's oil reservoirs are numerous (over 360 are currentLy in production), but they are generally of small size and short-lived. The average well produces approximately 60 barrels per day and lasts only ten years. Out of approximateLy 7,000 producing oiL wells, 600-700 cease production every year and must be replaced just to maintain production. Operating Results 2.21 YPF's financial situation has been very seriously affected by the very large rates of Argentine inflation and the large differentials between rates of domestic inflation and the rate of change of the value of the Argentine peso relative to the US dollar. The impact of these effects on YPF can be separated into monetary gains (or losses) and exchange gains (or losses). Monetary effects have resulted primarily from differences in amounts of assets and liabilities denominated in pesos. As YPF's peso liabilities have generally exceeded its peso assets, these effects have generally been positive. Exchange effects have resulted from much of YPF's debt being contracted in dollars, whereas the company's assets (and earnings) are in pesos. These effects have been particularly large and usually negative. 2.22 Adjustments to YPF's capital account necessary to reconcile revaluations of assets and the differential impact of monetary and inflation adjustments upon asset and liability accounts have been carefully accounted for by YPF. The magnitude of these items, however-particularly during the 1981-83 period-has been very large, to the point of rendering difficult meaningful financial analysis of operations. The adjustments in YPF's income accounts are made on a year-end basis and not aLlocated on a line-by-line basis. As a result, comparative interpretation of historical income statements on an item-by-item basis is very difficult. 2.23 Summary historical income statements, following YPF's own accounting format, are shown in Table 2.2, following page. 2.24 YPF's cost of goods sold and operating costs have, according to its statements, regularly exceeded revenues net of fuel excise taxes. Nevertheless, because of monetary and inflation adjustments, it is difficult to draw firm conclusions with respect to the profitability of YPF operations. During periods when the peso devalued more rapidly than it inflated (notably 1981-82), YPF was negatively affected by these adjustments; during periods of parallel rates of devaluation (1983) or strengthening of the peso relative to the dollar (such as prevailed during 1979-80), the net - 31 - monetary and inflation adjustment was positive.!' The principal benefit from inflation realized in the past has been gains from declines in the real value of YPF's liabilities. The principal cost of devaluations has been increases in the relative value of YPF's dollar-denominated debt. 2.25 Summary historical balance sheet data for YPF are presented in Table 2.3. Data are presented in constant December 1984 dollars, based on constant peso adjusted figures prepared by YPF and converted to US dollars according to the official rate. Individual balance sheet items are revalued or adjusted as of year-end; overall balancing adjustments are consolidated in the net worth account. Table 2.2 YPF: Summary Historical Income Statements (Constant 1984 USS Millions) 1979 1980 1981 1982 1983 1984 a/ Gross Retail Sales: 3,046 3,327 3,878 3,154 4,149 4,609 - Fuel Excise Taxes: (781) (976) (1,249) (1,015) (1,067) (1,653) Fuel Taxes as % of Gross Retail Sales: 25.6% 29.3% 37.2% 32.2% 25.7% 35.9% = Net Domestic Sales to YPF: 2,265 2,351 2,629 2,139 3,082 2,956 D Discount (Margin) to Retailers: (111) (134) (146) (99) (151) (185) + import Subsidy: 324 186 172 16 0 - N oet Revenues to YPF: 2,478 2,403 2,655 2,056 2,931 2,771 Cost of Goods Sold and Operating Costs: (2,546) (2,618) (2,779) (2,590) (3,193) (3,162) - Other Income (Net):b/ 47 110 198 333 208 200 Financial Costs: (303) (342) (667) (794) (970) (750) - Profit before Adjustments: (325) (448) (594) (995) (1,024) (941) + Net Monetary and Inflation Adjustment: 657 1,200 (1,283) (786) 1,778 0 = Profit after Adjustments: 332 752 (1,877) (1,781) 754 (941) a/ Provisional. b "Other Income" is primarily a refund of value-added tax. This item also includes income from sale of utilities services, freight and scrap which are regular sources of income to the company. Note: These statements are expressed in constant 1984 US dollars, converted at the official rate of exchange from constant Argentine peso equivalents. Numbers may not add because of rounding. Source: YPF, mission calculations. 2.26 YPF's (adjusted) net worth deteriorated significantly, from levels of US$2.4 billion equivalent as of end-1980 to negative US$1.2 billion equivalent as of end-1982. While this situation was severe, it also characterized all enterprises in Argentina which borrowed dollars, held peso assets, and the earnings of which were primarily in local currency during this period. During 1981-1982, the rate of exchange of the Argentine peso relative to the US 1/ Changes in domestic rates of inflation and devaluation relative to the US dollar are shown in the memo items to Table 2.3, following. - 32 - dollar deteriorated more rapidly than domestic rates of inflation by a factor each year of approximately two to one. 2.27 The dollar debt which YPF had outstanding as of year-end 1980- approximately US$1.5 billion-doubled in constant peso terms during 1981 and again during 1982. Further, YPF borrowed significant additional amounts of dollars during the 1981-82 period. After disbursement of the dollar amounts borrowed by YPF was made to the Central Bank of Argentina (and peso equivalent amounts advanced to YPF), however, foreign exchange was not subsequently made available to YPF to the extent of the resources borrowed. Much of the increase of YPF's foreign debt during this period can be considered to have been incurred on behalf of the Government of Argentina for balance-of-payments purposes. Table 2.3 YPF: Suomary Historical Balance Sheets (Constant 1984 USS millions) 1979 1980 1981 1982 1983 1984!_ ASSETS Cash and Investments: 56 145 202 40 87 110 Credits: 479 303 324 200 382 392 Inventory: 279 308 329 254 295 327 Net Fixed Assets, Revalued: 2,972 4,139 4.353 3.936 5.558 6,062 TOTAL ASSETS: 3,786 4,895 5,208 4,430 6,322 6,891 LIABILITIES Current Liabilities: Commercial and Other: 626 661 660 721 955 2,098 Banks and Other Financial: 779 1,052 2,407 3,058 3,232 3,233 Long-Term Liabilities: Commercial and Other: 145 177 245 265 218 216 Banks and Other Financial: 542 559 1,327 1,598 1,309 1.390 TOTAL LIABILITIES: 2,092 2,449 4,639 5,624 5,714 6,937 Of which: Local Currency: 808 974 828 704 1,081 Foreign Currency: 1,285 1,477 3,846 4,941 4,633 NET WORTH 1.694 2,446 569 (1,212) 608 (46) TOTAL LIABILITIES & NET WORTH: 3,786 4,895 5,208 4,430 6,322 6,891 MEMO ITEMS Current Ratio: .58 ,44 .27 .13 .18 .15 Quick Ratio: .38 .26 .17 .06 .02 .02 Debt:Equity Ratio: 55:45 50:50 89:11 negative 90:10 negative Change in Consumer Price Index: 160% 101% 105% 165% 344% 627% Change in USS Exchange Rate: 65% 41% 210% 355% 303% 542% Index of YPF Salaries, USS (1978=1): 1.55 1.94 1.14 0.53 a/ Preliminary. b/ Includes approximately USS1.4 billion in capital support during 1983 and 1984. - 33 - 2.28 In order to re-establish YPF's financial integrity, it will be necessary not only to increase prices net to YPF after fuel excise taxes and other taxes to restore YPF's earning power, but also to recapitalize the company. Important adjustments in petroleum product prices have already taken place at the retail level, although prices to YPF net of taxes remain low. Commitments with respect to future price adjustments and net revenues to YPF will be requei ed of the Government of Argentina in connection with the proposed loanz'. Recapitalization is being accomplished by means of a commitment by the Government of Argentina to pay much of YPF's debt contracted in foreign currencies, as discussed below. These steps will simultaneously increase YPF's net worth and decrease the debt service burden on YPF's cash flow. Commitment by the Government of Argentina 2.29 Legislation passed in November 1983 provides for payment by the Government of Argentina of both principal and interest on much of YPF's foreign debt. The amount of the Government support was $a57,821,138,000 as of November 1983. This was approximately US$3.3 billion equivalent based on official November 1983 rates of exchange, or approximately two-third of YPF's foreign currency liabilities. The 1983 legislation provides in general terms that the amount of the commitment is to be adjusted with inflation, to accrue interest at a rate equivalent to the (real) cost of YPF's dollar borrowings, and to be disbursed as YPF's debt service obligations fall due until fully utilized. 2.30 Disbursement of the Government commitment depends upon the debt service schedule determined for YPF as part of the rescheduling of Argentina's public sector debt, of which the YPF debt is a part. Specific procedures for implementation of the commitment, including the specific mechanisms for adjustment and disbursement, have been prepared by the Ministry of Public Works and are to be issued shortly as a Presidential decree. Issuance of this decree with content satisfactory to the Bank is a condition of effectiveness of the proposed loan. Projections 2.31 The unusual circumstances under which YPF has operated during recent years and the unsatisfactory financial situation of the company at present make it very difficult to project financial results for the company with confidence. The Bank, YPF and the Government of Argentina have maintained an ongoing dialogue with respect to the financial situation of the company. The Bank was involved in discussions leading to the commitment by the Government described above. The Bank has also discussed on a continuing basis with the Government of Argentina not only pricing policies which are necessary to assure the economic allocation of energy resources, but also taxation policies which, together with appropriate pricing, would assure the financial viability of YPF. 2.32 As a basis for these discussions, a detailed financial model of YPF has been prepared by Bank staff. The model has been revised and reviewed 1/ See also discussion under "Pricing," Part I of this Staff Appraisal Report. - 34 - frequently with YPF and Government authorities. Repeated use of the model has provided useful insight into YPF's financial situation. A more complete discussion of assumptions employed in the model and financial results projected is attached as Annex X. In the "base case" scenario used in the model prices of lighter distillates are assumed maintained in constant dollar terms and middle and heavy distillates increased two percent per month in rela terms over an eighteen-month period, in conformance with policies announced by the Government. Fuel excise taxes are assumed to decline from present levels to twenty percent of gross retail sales by 1989. 2.33 The model shows that, based on the covenants associated with the proposed loan, YPF's financial situation would improve significantly and within the project period (1988), profitability would be achieved. The model does not incLude any assumptions regarding chsnges in the cost structure of YPF's operations or changes in the rate at which petroleum is discovered and produced based on YPF's own projections. Technical assistance components of the proposed loan are directed to improving both the efficiency of operations and the evaluation of investment priorities and may improve the results projected. 2.34 YPF is currently reviewing its 1985 investment program with the Government. This process is made difficult by the slow and cumbersome financial and information systems within YPF. It is important that improved information systems be established which would permit YPF and the Government to evaluate expeditiously the relative feasibility of various projects, and to assign priorities among them within the general objective of optimizing development of the country's oil and gas resources, particularly in respect to the participation of the private sector. To assist YPF in achieving these objectives, the proposed project includes specific provisions for improved information systems and planning capabilities. The systems support is designed both to improve the information available to management and to recommend opportunities for more efficient decision-making. The objective of the planning support will be to create a mutli-year planning capacity based on improved resource data and optimization criteria. This effort would be coordinated with the planning effort at the Government level also supported under this project. Proposed Investment Program 2.35 YPF has proposed a tentative investment program for the 1985-89 period which includes provision for maintaining efforts in exploration for and production of petroleum essentially at current levels and provides for completion of the refineries reconfiguration program being undertaken with World Bank financing. The investment program proposed by YPF is suunmarized below by functional area according to YPF's categories. 2.36 YPF has not been able to develop consistent long-range investment planning. The investment program shown above reflects a short-term strategy aimed at maintaining production at current levels. The exploration efforts have been concentrated in low-risk areas. This limited objective has been necessitated by current financial constraints. However, it does not provide a basis for long-term development of Argentina's oil and gas resources. More detailed review of the priority of investments in the context of optimized production of both oil and gas is needed. - 35 - Table 2.4 ARGENTINA: Projected YPF Investment Program (1964 USS Milions) 1985 1906 1987 1988 1989 Exploration: 202 228 265 266 286 Drilling: 45 56 56 56 56 Production: 528 680 622 577 573 Refining: 198 262 222 146 38 Transportation: 18 32 37 42 47 Sales: 9 14 16 17 18 Administration: 9 11 12 14 15 Total: 1,009 1,283 1,231 1,058 1,033 2.37 Review of both YPF's investment program and total investment in the oil and gas sector has been included in technical assistance components under the proposed loan. YPF's investment program would be reviewed with the Covernment and the Bank on a periodic basis, including estimates of investment by the private sector. These steps should contribute to a more efficient investment program by the company and to improved coordination of investment between YPF and the private sector. 2.38 Total investment (local and foreign) in the proposed project components averages approximately US$100 million annually over the project period, or 15-18 percent of investment in production facilities projected by YPF. Total project investment in relation to YPF's total proposed investment program is of the order of 8-10 percent. Financial Covenants 2.39 In conjunction with the Refinery Conversion Loan, YPF covenanted with the World Bank, among other conditions, that: (a) "The Borrower shall (i) maintain a quick ratio of 0.6:1, and (ii) not ... make any ... cash distribution, if after such [distribution] ... such ratio would be smaller than 0.8:1 [Section 5.05(a)]; (b) "The Borrower shall, at all times, maintai' a debt:equity ratio not greater than 60:40" [Section 5.05(b)]; and (c) "The Borrower shall not incur any debt ... unless ... the projected net revenues of the Borrower ... shall be at least 1.4 times the projected debt service ... [Section 5.05(c)]. 2.40 The ratios which result from the assumptions incorporated in the financial model (Annex X) are summarized in Table 2.5 below. - 36 - Table 2.5 YPF - Projected Financial Ratios Projected 1985 1986 1987 1988 1989 "Quick" Ratios Including Government Comuitment: 1.3 1.2 1.0 0.9 0.8 Excluding Government Commitment: 0.6 0.6 0.5 0.5 0.5 Debt:Equity Ratio: Including Government Comitment: 68:32 69:31 68:32 64:36 57:43 Excluding Government Couuitment: 100:00 94:06 86:14 74:26 61:39 Debt-Service Ratio: including Government Coamitment: 2.0 2.7 3.1 2.3 2.7 Excluding Government Comnitment: 1.0 1.7 2.1 1.6 1.9 Note: Refinancing of YPF foreign debt obligations Is assumed during 1985 on the same terms as have been announced for long-term public sector debt held by comuercial banks. 2.41 At the time of the Refinery Conversion Loan (1981), the effects of the South Atlantic crisis of 1982 and the extraordinary rates of inflation and devaluation which followed could not, of course, be anticipated. The Refinery Conversion Project Loan Agreement does not define how the Government support commitment, legislation for which was passed in 1983, should be interpreted in terms of YPF's financial covenants to the Bank. The Bank has agreed to include undisbursed balances of this commitment in the calculation of the ratios for certain purposes, as discussed below. (Results from the financial model both including and excluding the commitment are shown above). 2.42 The covenant regarding YPF's quick ratio is designed to assure adequate liquidity and to prevent cash distributions unless the company is sufficiently liquid. Under current circumstances (in which YPF is very illiquid), such distributions should not be permitted (nor have any been made). An important determinant of YPF's future quick ratios will be the rescheduling of YPF's short-term debt (including payments in arrears) to a long-term basis. The Bank has agreed to include disbursement of funds from the Government capital support commitment during the next year in the evaluation of this ratio. No distribution would be permitted until a quick ratio of 0.8 is achieved, as provided by existing covenants under the Refinery Conversion loan. 2.43 With respect to YPF's debt:equity calculation, inclusion of the undisbursed balance of the Government's capital support commitment as equity makes an important difference; this reflects the recapitalization intent of the commitment. The Bank has agreed to the inclusion of undisbursed balances of the Government capital support commitment as equity for the purpose of evaluating this ratio. The Bank's projections suggest, however, that even including the Government commitment as equity, YPF's debt:equity ratio will still exceed the 60:40 level until 1989. The Bank has accordingly agreed that this ratio be achieved at least in accordance with the following timetable: through end-1987, 68:32; by end-1988, 66:34; and by end-1989, 60:40. 2.44 The Government commitment, by meeting much of YPF's debt-service obligations, has the effect of minimizing debt service as a financial - 37 - constraint. YPF should meet the minimum 1.4 ratio covenanted if payments by the Government to meet YPF's debt-service obligations in a given year are included in the calculation of this ratio. The Bank has agreed to inclusion of the capital support commitment on this basis. 2.45 In current operating terms the most important determinant of YPF's financial viability is its revenues net of fuel excise and other taxes (including royalty payments). In this respect commitments by the Government to increase middle and heavy distillates prices relative to gasoline should -- together with maintenance of gasoline at current price levels and no increases in taxation - provide YPF financial self-sufficiency. The Government has agreed to assure that petroleum product prices net to YPF of all taxes and royalties will be adequate to provide YPF, operating efficiently, with funds sufficient to cover YPF's costs and expenses, including interest; to allow YPF to meet the financial covenants above-described; and to achieve at least a six percent return on YPF's revalued net fixed assets. Auditing and Reporting Requirements 2.46 YPF will be required to submit to the Bank annual financial reports audited by the Sindicatura General de Empresas Publicas within six months of the end of each fiscal year. The audit reports will contain comments by the auditors whether the covenants in the Loan Agreement are being met. 2.47 YPF also would be required to submit to the Bank: (a) Quarterly financial projections and projected investment program within one month of the beginning of each quarter; and (b) Twelve-month and three-year financial projections including investment program within four months of each fiscal year. 2.48 The projections prepared above would initially be based on YPF's existing reporting system but would include the results of the work of the systems consultants as this becomes available. These reports would be reviewed annually by the Bank jointly with the Government of Argentina on a periodic basis. The preparation of projections and their use for planning purposes by YPF management and the Government is an important objective of the technical assistance program proposed under the present loan. 2.49 Within four months after the Closing Date of the project, YPF would be required to prepare and furnish to the Bank a Completion Report. - 38 - PART III - THE PROJECT Objectives 3.1 Although natural gas reserves, following discoveries in the late 1970s, have increased to the equivalent of 45 years of production (at 1983 levels), their development poses a number of technical and economic issues. In particular, oil and gas production must be jointly optimized. Many fields have high gas-oil ratios. In several areas oil production has had to be limited to avoid the flaring of large volumes of gas for which there is no outlet into the pipeline network; in other industrialized areas, gas demand remains partly unmet. Lack of infrastructure is the principal constraint to YPF's and Gas del Estado's flexibility to move gas supplies. Expansion of the capacity of the Northern Gas Pipeline has been identified as the most cost- effective way to utilize Argentina's rapidly increased gas reserves to main consumers in the Buenos Aires area. 3.2 A number of other gas debottlenecking projects of smaller size require further preparation before they can be financed. Nevertheless, because of the debottlenecking character of these projects, they are of high priority and offer large economic returns. Opportunities also exist for substantial recovery of additional petroleum resources from Argentina's existing mature fields by enhanced oil recovery techniques, and for the substitution of liquid hydrocarbon consumption in vehicle transportation by the use of compressed natural gas (CGG). 3.3 The objective of the proposed project is to move forward in each of these areas. The production of gas and associated liquids would be increased through gas field development and expansion of the transmission system in the north; a number of gas and pipeline debottlenecking projects in the country identified on a preliminary basis would also be financed; use of gas would be expanded by the introduction of CNG in transportation; and oil production would be improved by use of enhanced oil recovery methods and more effective reservoir management by YPF. In addition, technical assistance components of the project would strengthen YPF's organization, financial administration and investment planning capabilities, together with assistance in specific operations areas, and support the Government's energy planning effort. Project Description 3.4 The project includes facilities associated with the expansion of the Northern Production and Transmission System, other gas and liquids debottlenecking subprojects and enhanced oil recovery pilot projects, compressed natural gas utilization, and technical assistance to YPF and the Government of Argentina. A summary of project components including financing proposed for the Bank is shown in Table 3.1 following. * 39- Table 3.1 Sunmmry of Project Components (tSS Million) Local Foreign Of Which Currency Currency Total I BRD Expansion of the Northern Pipeline System: Field Development: 71.5 9.4 80.9 - Pipeline Expansion: 113.7 40.6 154.3 - y Campo Duran Liquid Rovor#iy;FacilIties: 63.1 47.8 110.9 47.8 Gas Debottlenecking and Entancgd Oil Recovery: 57.8 35.7 93.5 35.7 Lujan de Cuyo Pipelines:. 106.6 26.1 132.7 26.1 Compressed Natural Gas: 4.7 7.9 12.6 7.9 Technical Assistance: 2.4 7.1 9.5 7.1 Base Cost: 419.8 174.1 594.4 124.6 ContingencFes (Physcial and Price): 115.3 46.2 161,5 36.5 Total Project Cost: 535.0 220.8 755.8 161.1 Interest during Construction: 16.0 30.8 46.8 18.9 Total Financing Required: 551.0 251.6 802.6 180.0 I/ Financing being arrang#4 wvth the Inter-AMerican Development Bank. Expansion of the Northern Gas Production and Transmission System 3.5 Gas demand has been growing steadily in the Buenos Aires area and in the other industrialized zones of Argentina, particularly along the corridor extending north of Buenos Aires to Rosario, Santa Fe, Cordoba and Tucuman. However, YPF and Gas del Estado have been unable, primarily for financial reasons, to undertake the investments required to expand the production facilities and the transmission systems, which currently operate at capacity. As a result, potential gas demand remains unmet, and some present industrial users and power utilities are obliged to revert to liquid fuels in the winter when total demand on the system peaks. No further growth of gas demand can be accommodated by existing facilities. Growth in potential demand is estimated to be grdwing at 18 percent annually. 3.6 The Northern Cas Line expansion component of the proposed project aims at expanding gas delivery capacity to Buenos Aires and to other high demand areas. The component includes (a) field development in the Aguarague, Ramos and Acambuco fields; (b) increase in the capacity of the Northern Pipeline System; and (c) expansion of a liquid recovery system at Campo Duran. (a) Field Development - This includes the drilling of 16 wells in the Aguarague field within the next 15 years for additional production. Development of the Aguarague field, including associated flow lines and surface facilities, requires relatively little direct foreign exchange: tesources, and will be undertaken by YPF on its . - 40 - own account. Similarly, the Ramos and Acambuco fields are expected to be developed by the respective private sector contractors who operate these fields. (b) Capacity Increase of the Northern Pipeline System - The expansion of the Northern Pipeline is being undertaken by Gas del Estado, with Inter-American Development Bank (IDB) financing. While four major pipeline systems converge on the Buenos Aires area, all of which require expansion, the Northern Pipeline is of the highest priority because of the concentration of existing and projected gas demand in the cities along this route, which follows the northern industrialized corridor. The pipeline was built in 1971 to transport gas imported from Bolivia (225 MMCFD) under a take-or-pay contract which expires in 1992, and from other fields in northern Argentina. The capacity of the Northern Pipeline can be expanded in a cost-effective manner from 335 MMCFD to 475 MMCFD by adding compression stations. The pipeline currently accommodates only a fraction of the potential gas production of the fields located near the head of the line in Argentina, discovered in the late 1970s. (c) Expansion of the Campo Duran Liquid Recovery Plant - It is proposed that the liquid recovery system capacity at Campo Duran be expanded from 250 to 575 MMCFD by installing a new turbo expander unit and revamping the existing one. This would permit the most efficient recovery of liquids from increased gas production. Reinjection compressors at the Campo Duran field are also included to rTinject excess gas in the summer, together with facilities to collect and transport gas and liquids. The Campo Duran facilities would be financed by the Bank. More detailed description of this component, including criteria for selection of the turboexpander process for recovery of gas li-uids, is given in Annex V attached. 3.7 The major parameters for expansion of the Northern Gas Production and Transmission System have been reviewed and found to be suitable to support the additional supply of gas. These include: (a) Reserves and Production: The proven gas reserves (more than 3.3 TCF) and production history of oil and gas fields in the Campo Duran area (Salta province), where the Northern Pipeline originates, will assure, together with gas imporis from Bolivia, adequate continuous supply of the current (335 MMCFD) and the additional (140 MMCFD) volume of gas required for the expansion for at least twenty years. Production volumes from the Argentine fields are also adequate for supply purposes assuming imports of gas from Bolivia are terminated once the - 41 - contract between Ar-gentina and i.--ilivia expires in 1992. The producing fields (Aguarague, Raos, Campo Duran and Acambuco) and associated reserves and production data are described in detail in Annex II. Reserves estimates are based on reservoir studies carried out by YPF, their consultants (Inlab S.A.) and private operators. They also have been reviewed by Bank-financed consultants. They are considered reasonable and agree with the basic assumptions used by the Inter-American Development Bank (IDB) in their evaluation of the pipeline component of the expansion of the Northern Transmission System. The gas produced by these fields is relatively rich in liquids which can be recovered and sold in Argentina or exported. (b) Existing Infrastructure: A multi-product 16" pipeline connecting Campo Duran to the San Lorenzo refinery, near Rosario north of Buenos Aires, has sufficient spare capacity to transport the additional volume of natural gas liquids foreseen either for the Buenos Aires market or for export. The nearly depleted Campo Duran field can be used as underground storage for excess gas being produced during off-peak periods. Distillation facilities, a dehydration unit, utility services, and product storage tanks presently at Campo Duran have adequate capacity for the additional volumes to be handled. 3.8 The availability of gas in 1992 has been evaluated both under the assumption that the Bolivia export contract is extended for another 10 to 20 years, and assuming that the the Bolivia export contract is not extended and gas is provided only from the local Argentine fields. SuppLy is adequate under either scenario. The supply of gas is summarized in Annex V (Table V.1), attached. .9 Liquid products from the existing and the new faciLities are summarized in Table 3.2 following: Table 3.2 Increased Natural Gas Liquids from Turbo-Expander Facilities Value of 1984 1992 Increase TPD B0 TPD 80 (USSMt/yr) Ethane: - - 740 12,470-/ 21.6 Propane and Butane: 470 5,500 950 11,0002/ 28.2 Natural Gas Liquids: 103 900 270 2,350 42,2 Total: 70.4 Note: TPD - tons per day; BO = barrels per day (equivalent). I/ Based on approximate equivalents. - 42 - 3.10 In addition to these liquids, which are extracted from the natural gas stream at the turbo expander facilities, the increase in production of natural gas will result in the produciton of additional volume of condensate oil (API 50-55w) of the order of some 4,500 BPD. This condensate is transported directly from field separators to the Campo Duran topping plant (for further processing) through an oil pipeline which is also to be financed under the proposed loan. Debottlenecking Subprojects and Enhanced Oil Recovery Pilot Projects 3.11 A number of gas projects need to be undertaken to remove bottlenecks which presently prevent YPF from moving towards more optimum joint production of oil and gas from existing fields. Although no projects have yet been fully appraised, a number of project proposals at various stages of preparation have been reviewed with YPF and their consultants. Some of these were identified in the Gas Optimization Study carried out by Stone and Webster. A component of the project would be allocated to finance these relatively low-cost projects (US$5-10 million equivalent) which, because of their debottlenecking character, can generate significant economic benefits. 3.12 Individual projects would be submitted to the Bank on a case-by-case basis for approval. A tentative list of such projects is provided in Annex VI. Examples include: (a) Compression facilities for the reinjection of gas during off-peak seasons to avoid flaring; (b) Liquids separation units to recover marketable liquids from natural gas (otherwise burned); and Cc) Gathering lines and small field compressors to collect gas presently being flared. Criteria for project evaluation will include contribution towards optimization of oil and gas production system-wide. 3.13 Funds allocated under this component would also be used to finance a group of enhanced oil recovery (EOR) pilot pro. cts to be undertaken by YPF. Technical assistance, training and studies for more effective reservoir management in ongoing oil production operations would be included in this component. YPF, with the help of consultants financed by the Bank, has identified ten fields as suitable for use of EOR methods (see Annex VI). Initial work would be focused on five of these candidate fields. Financing would be provided to evaluate fields in stages. First, feasibilit-y studies would be undertaken on all the candidate fields. If prospective results are justified by the feasibility studies, which would be submitted to the Bank, specialized studies of core samples and resevoir characteristics would be undertaken, and simulation studies done. Finally, pilot projects would be constructed, including drilling, workover, and completion. The results of the pilots would be carefully evaluated. 3.14 Expert consultants would be contracted for this work, and YPF staff would be trained on an on-the-job basis at each of the steps. The EOR project component should enable YPF together with the consultants, to identify the - 43 - highest priority fields with enhanced oil recovery potential, to define an implementation program to economically recover additional oil from the selected fields, and to evaluate institutional and contractual arrangements for future EOR work. 3.15 YPF has had to postpone many gas debottlenecking and enhanced oil recovery projects primarily for lack of foreign exchange resources. Although the costs of these projects are small, the impact in terms of increased oil production and recovery of gas liquids can be significant. For example, in the Loma de la Lata field, approximately 1,100 BPD of oil production is foregone because of lack of compressors to reinject associated gas. Similarly, numerous enhanced recovery projects have not been undertaken where incremental oil production is projected to be less costly than alternative sources. 3.16 The proposed loan will provide for US$46 million (including contingencies) to finance the foreign exchange cost, not to exceed US$10 million per project, of production debottlenecking and enhanced oil recovery subprojects subject to prior approval by the Bank. Eligible subprojects should meet a high priority test in the context of optimization of overall oil and gas production on a country-wide basis. Debottlenecking subprojects should yield economic rates of return of no less than 15 percent. The eligibility of pilot projects for enhanced oil recovery will be based on potential benefits, taking into account the probability of results as well as cost. 3.17 YPF's annual work plan with respect to these projects will be reviewed and agreed with the Bank and with the Energy Secretariat in the framework of an annual joint review of YPF's overall investment program. The criteria for selection and the procedure for appraisal of individual subprojects will be agreed with the borrower. The Bank's approval of subprojects will permit the Bank to monitor YPF's effectiveness in optimizing its production system. Lujan de Cuyo Pipelines 3.18 Under the 1981 Refineries Conversion Project, YPF undertook to build a new crude pipeline to assure the efficient supply of crude oil to the Lujan de Cuyo refinery, and to upgrade the system of white product pipelines to transport the increased production of light and middle distillates resulting from the conversion project. These pipelines need to be completed by 1987, when the new upgrading facilities of the refineries are expected to come on stream. Investments in the pipelines, however, have been delayed because of lack of foreign exchange to import special parts and equipment. The project component would address this problem. 3.19 The Lujan de Cuyo refinery is in Mendoza Province, in the west of Argentina. It is the second largest refinery in Argentina, with approximately 130,000 barrels/day (BPD) of primary distillation capacity. Approximately 80,000 BPD of crude oil are supplied to Lujan de Cuyo from neighboring fields in northern Mendoza and about 30,000 BPD are supplied from Malargue, about 160 km to the south. Crude oiL from Malargue is presently supplied by rail and truck, at relatively high cost. Production of the Mendoza fields and, to a lesser extent, also that of Malargue, are expected to decline relatively rapidly over the next five years, tapering off thereafter and tending to stabilize at approximately two-thirds of current production levels in the 1990s. The resulting gap in the crude supply for the Lujan de Cuyo refinery is expected to be approximately 20,000 BPD in 1986 growing to over 50,000 BPD by the early 1990s and to approximately 55,000 BPD by the year 2000. This gap can be filled by production from Puesto Hernandez, a field located a further 290 km south of the Malargue (450 km from Lujan de Cuyo). 3.20 Production from Puesto Hernandez at present can be transported to the Lujan Cuyo refinery by trucking it 220 km to Divisadero, 70 km south of Malargue, then piping it to Malargue using an existing 16" pipeline !'; then transhipping it partly on rail tankers and partly on tanker trucks for the last 160 km to Lujan de Cuyo. This system is cumbersome and costly (over US$5/barrel in transportation costs), and will increasingly affect the economics of the Lujan de Cuyo refinery as its crude supply becomes increasingly dependent on crude from Puesto Hernandez. 3.21 YPF proposes to complete the pipeline link between Puesto Hernandez and Lujan de Cuyo, via Malargue, by extending the short existing pipeline 220 km towards the south (from Divisadero to Puesto Hernandez), and 160 km towards the nc.cn (from Malargue to Lujan de Cuyo). The pipeline would have an initial capacity of 63,000 BPD. It would operate initially (1986) at 57,000 BPD in the Malargue-Lujan de Cuyo section and at 38,000 BPD in the Puesto Hernandez-Halargue section. Utilization of the northern section will reach full capacity by 1989 when two new pumping stations would be added to expand capacity to 80,000 BPD. 3.22 YPF has prepared a feasibility study of the proposed pipeline system, according to which total investment costs would amount to US$91 million. Total foreign exchange requirements are estimated to be approximately US$22 -million. Expanding the capacity of the pumping sations in 1989 would cost US$8 million at 1984 prices. The present value of savings in transportation costs over the life of the project (15 years) would amount to US$240 million equivalent, and the financial rate of return would exceed 30%. YPF has also carried out a sensitivity analysis of the project, assuming slower-than- projected declines in the crude production of Mendoza fields and investment costs exceeding extimates by 50%. Financial rates of return under these circumstances would then be 24% and 22%, respectively. 3.23 A second pipeline investment is proposed by YPF for expansion and rehabilitation of an existing product pipelines from Lujan de Cuyo to the Buenos Aires area. This expansion is needed because the ongoing Refineries Conversion Project will increase Lucan de Cuyo's production of higher-value lighter distillates versus fuel oil. Lujan de Cuyo is about 1,000 km from San Lorenzo and Buenos Aires, the major consuming centers of refinery products. I/ The pipeline between Divisadero and Malargue was originally built to feed Malargue crude to a small topping plant in Divisadero serving the local market. The topping plant has since been closed down, and the direction of the pipeline has been reversed. - 45 - There is an existing network of product pipelines from Lujan de Cuyo to San Lorenzo and to La Matanza, a distribution center near Buenos Aires. The project would upgrade the system's current capacity of 82,000 BPD to 113,000 BPD by removing bottlenecks which requires new storage capacity along the pipeline's route, adding pumping stations and replacing a 90-km section of the existing 14" pipeline with 16" pipe. 3.24 According to YPF's feasibility study of this project, the total costs of upgrading of the pipeline system are estimated at US$65 million equivalent. Total foreign exchange requirements are estimated to be approximately US$12 million. Returns of this investment are associated with the return of the complete Refinery Conversion project, for which the ERR was estimated at 42X. Compressed Natural Gas 3.25 The transport sector in Argentina accounts for approximately one- third of total energy consumption and sixty percent of the consumption of petroleum products. The conversion of motor vehicles to compressed natural gas (CNG) would substitute part of the consumption of liquid fuels with domestic natural gas, which is abundant, available at low cost and, at least for the time being, cannot be exported. This would release crude oil and products for export, generating corresponding foreign exchange earnings. The feasibility of a CNG conversion program is enhanced in Argentina by the concentration of population -- and hence of the vehicle fleet - in the Buenos Aires area and in a few other urban centers, all of which are serviced by natural gas pipelines. As a result, the only investments required to implement a CNG program are a network of filling stations and th I/retrofitting of vehicles, for which the technology exists and is well tested._ 3.26 YPF has prepared estimates based on indicative Government targets as part of a long-term plan for conversion of vehicles to CNG use. The estimates show that conversion of about three percent of the total fleet in the country and would eventually lead to the substitution of CNG for approximately five million barrels per year of gasoline and diesel. This would entail conversion of some 135,000 vehicles over a ten-year period, to be served by 370 stations 1/ CNG has been used successfully to fuel motor vehicles for over forty years in Italy, where over 350,000 converted vehicles circulate, served by approximately 300 refilling stations. The system has been used for captive fleets in many countries, including the United States, where approximately 30,000 vehicles are in service. In recent years, Canada and New Zealand have launched programs to distribute CNG to the public at large. In New ZeaLand 70,000 vehicles have been converted and 150 refilling stations built in three years. CdG for transport is being introduced on an experimental basis in several other countries. In Bangladesh, one such experiment is being carried out under a Bank-financed project. The technology for vehicle conversion and filling stations is available from several-albeit relatively few-manufacturers of different countries (notably Italy, Canada, the US, New Zealand and Japan). The safety record of the system is excellent. - 46 - utilizing a total of 550 refilling pumps. A breakdown of the types of vehicles projected to be converted under such a plan is shown in Table 3.3. 3.27 During the beginning of the CNG program, conversion would be concentrated on gasoline-powered taxis and trucks; private passenger cars and diesel trucks would be converted later. While there are economically attractive opportunities for substituting certain diesel fleets, this is more feasible in practical terms in a later phase of development of the system because diesel vehicle owners can be induced to incur the cost of conversion only after a sufficiently widespread network of fillini stations is firmly established since diesel engine conversion is more expensive than gasoline and virtually irreversible. Furthermore, a successful program of introducing CNC for heavy trucks and busses may have to rely on the cooperation of vehicle manufacturers to produce CNG dedicated vehicles, Which will require time to achieve. Table 3.3 Argentina: Projected Use of CNG in Transportation 1989-1994 1985 1986 1987 1988 av/yr Total Automobiles: - - - - 5.230 31,380 Trucks: 1,585 1,265 1,920 3,990 9,140 63,600 Public Transportation: Taxis: 3,080 6,110 5,845 6,300- 2,875 38,570 Other - - - - 275 1,650 Totaal: 4,665 7,375 7,765 10,290 -17,520 135,200 Cumulative Total: 4,665 12,040 19,805 30,09, 135,200 CNG Consumed (BCF) 1 3 6 8 21 144 Gasoline Replaced (Mbl) 235 603 956 1,345 2,525 18,300 Diesel Replaced lBbl) 0 0 19 75 820 5,000 3.28 The proposed project includes financing approximately 20 new and retrofitted refilling stations (30 refilling pumps) and technical assistance from consultants experienced in the planning, implementation and management of CNG program. The initial group of stations would serve-as a pilot basis for evaluating CNG use, as well as encourage CNG development by demonstration. It is expected that taxis will be major initial users of CNa. An associated feasibility study would include evaluation of CNG compared to other alternative fuels (including methanol and gasoline produced from natural gas). This study would cover user attitudes and pricing and fiscal implications of vehicle conversion. If the feasibility study supports the CNC alternative as the most appropriate, the conversion program would be expanded along the lines indicated above. 3.29 The stations built by YPF under this project component would be made available for leasing to private operators. Once a market has been established private investors are expected to take over the further development of the system. It is expected that it will be possible for - 47 - individual users to recover the cost of conversion (US$1,200-1,800 for gasoline powered vehicles and US$2,500-4,000 for diesel powered buses and trucks) in less than one year from fuel cost savings. Technical Assistance to YPF 3.30 A summary of specific technical assistance components appears in Table 3.4 following. Technical assistance to YPF would include: (a) Review of YPF's organization and management structure, with the objective of streamlining decision-making, improving operational efficiency (including most effective use of subcontractors), and assuring appropriate balance between exploration and production activities, and field versus headquarters responsibilities (approximately 25 man-months of consulting services, expected to be provided primarily by export advisers at an estimated average cost of approximately US$15,000/man-month); (b) Improved accounting, bugeting, financiat control and management information systems covering both at headquarters and the decentralized regional administrations. Detailed terms of reference for this work would be prepared by expert advisers and tendered for bid by systems firms by year-end 1985. Provisions is included for both consulting services (approximately 60 man-months of consulting services, at an estimated cost of approximately US$12,000/man-month; an additional 60 man- month would be funded from undisbursed amounts under the technical assistance component of the Refinery Conversion Project, with which this work would be integrated) and equipment (primarily computers) for implementation of automated systems as recommended (estimated at US$750,000); (c) Preparation by a technical consulting firm of a feasibility study for the use of telecommunications equipment for automated remote field production management, and for installation of such equipment (approximately 100 man-months at an estimated cost of US$12,000/man-month), and acqusition of such equipment (estimated at US$1,600,000); (d) Developing a medium and long-term investment program and priorities and defining the appropriate level of investment required to assure the country's self- sufficiency in crude oil production. Work in this area would help define more precisely the borrower's role in the future development of the sector and the level of investment to be undertaken by YPF in complementing the exploration activities of private oil companies. It is expected that this work would be undertaken primarily by -48 - Tdabe 3.4 S.iny Ur Smdfic 1dui1 Aswnetn Caqimme 1, Lt I r TeAl U_ PArt D (IP) I. oq._mzat kin ad Stn.
World Bank Group · Staff Appraisal Report
Argentina - Gas Utilization and Technical Assistance Project
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Key facts
Organisation
World Bank Group
Document type
Staff Appraisal Report
Country
Argentina
Source
World Bank