Honduras - Petroleum Exploration Promotion Project

Document of The World Bank FOR oFFICIL USE ONLY Report No. 8010 PROJECT COMPLETION REPORT HONDURAS PETROLEUM EXPLORATION PROMOTION PROJECT (LOAN 1861-HO) AUGUST 1, 1989 Latin America and Caribbean Region Country Department II Infrastructure and Energy Operations Division This document has a restricted distribution and may be used by recipients only In the performance of their official duties. Its contents may not otherwise be disclosed witbouw World Bank authorization.  HONDURAS PETROLEUM EXPLORATION PLOM_OTION PROJECT (LOAN 1861-HO) i PROJECT COMPLETION REPORT CURRENCY EQUIVALENTS Currency Unit - Lempira tL) US$1.00 - L 2.00 L 1.00 - US$0.50 L 1,000,000 - US$500,000 WEIGHTS AND MEASURES 1 meter (m) a 3.28 feet tft) 1 kilometer (km) - 0.62 miles (mi) 1 kilogram (kg) - 2.2 pounds (lbs) ACRONYMS AND EQUIVALENTS CONSUPLANE - Economic Planning Council DGMH - General Directorate of )ines and Hydrocarbons GOa - Honduran Government MNR - Ministry of Natural Resources OLADE - Latin American Energy Organization  T1! WOtLD SANK FOR OMCIA S ONLY Wash*Iton. D C. 20433 US.A. Oce d D iwckw-Cmua August 1, 1989 MDEORANDUW TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECTs Project Completion Report on Honduras Petroleum Exploration Promotion Proiect (Loan 1861-HO) Attached, for information, is a copy of a report entitled "Project Completion Report on Honduras - Petroleum Exploration Promotion Project (Loan 1861-SO)a prepared by the Latin America and the Caribbean Regional Office. No audit of this project has been made by the Operations Evaluation Department at this time. Attachment T'bi docum n t has a tod dftbutio nd m rmy be uad by 1 omn I tb e ouam of their oikb dudea It coontet my c04 otbew be dmimssd nkw WoS Bank _uxd  FOR OMCIAL USE ONLV PROJECT COMPLETION REPORT HONDURAS PETROLEUM EXPLORATION PROMOTION PROJECT (LOAN 1861-HO) TABLE OF CONTENTS Pase No. Preface ........................................... i Basic Data Sheets ............. .....ii Highlights ........ ....................... iv PROJECT COMPLETION REPORT I. Introduction ...... ..............1 II. Project Identification, Preparation, and Objectives . 2 III. Project Implementazion .............................. 4 IV. Performance of the Borrower ...... ................... 8 V. Performance of Consultants 9........... ..... .......... 9 VI. Performance of the Bank .. ... ........... .. ............. -' . 10 VII. Project Costs and Disbursements .11 VIII.Conclusions. 11 Table Is Project Costs .. ... ............. ...... 13 ATTACHMENT 1 Comments from the Borrower ...................... 14 ATTACHMENT 2 Bank Reply to the Borrower .... .18 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  PROJECT COMPLETION REPORT HONDURAS PETROLEUM EXPLORATION PROMOTION PROJECT (LOAN 1861-HO) PREFACE This is the Project Completion Report (PCR) on the Petroleum Exploration Promotion Project ir. Honduras, for which Loan 1861-HO in the amount of US$ 3.0 million was approved on MHy 29, 1980. The loan was closed on December 31, 1985. US$ 0.2 million of the loan amount was cancelled. The PCR was prepared by the Infrastructure and Energy Operations Division, Country Department II, Latin America and Caribbean Regional Office and is based, inter alia, on the President's Report, the Loan Agreement, supervision reports, correspondance between the Bank and the Borrower, and internal Bank memoranda. This PCR was read by the Operations Evaluation Department (OED). The draft PCR wmas sent to the Borrower for comments and they are attached to the Report (Attachment 1).  ii PROJECT COMPLETION REPORT HONDURAS PETROLEUM EXPLORATION PROMOTION PROJECT (LOAN 1861-HO) KEY PROJECT DATA Appraisal Actual or Item Expectation Current Estimate Total Project Cost (US$ million) 3.7 3.0 (Under)/Overrun (Z) - (18.5) Loan Amount (USS million) 3.0 3.0 Disbursed 3.0 2.8 Cancelled - 0.2 Date for Completion of Physical Components 06/83 06/86 Economic Rate of Return (2) n.a n.a Financial Rate of Return n.a n.a Institutional Performance Satisfactory Unsatisfactory CUMUTL .TIVE ESTIMATED AND ACTUAL DISBURSEMEni'S (US$ million) As of June 30, 1981 1982 1983 1984 1985 1986 (i) Appraisal Estimate 1.8 2.3 2.8 3.0 3.0 3.0 (ii) Actual - - 0.1 1.4 2.5 2.8 (iii) (ii) as I of (i) - - 3.5 46.7 83.3 93.3 OTHER PROJECT DATA Original Plan Actual Government's Application 11/00/78 Preappraisal/Preparation 08/00/79 Appraisal 01/00/80 Negotiations 04/24/80 Board Approval 05/29/80 Loan Agreement Date 06/23/80 Effectiveness Date 10/01/80 10103/80 Closing Date 12/31/83 12/31/85 Borrower Government of the Republic of Hondtras Executing Agency General Directorate of Mines and Hydrocarbons Fiscal Year of Borrower January 1 - December 31 Follow-on Projects None  iii STAFF INPUT (Staff-Weeks) Bank FY 1980 1981 1982 1983 1984 1985 1986 Total Preappraisal 8.0 8.0 Appraisal 10.2 10.2 Negotiations 6.2 6.2 Supervision 0.8 13.2 10.2 15.3 17.3 17.6 12.3 86.7 Total 25.2 13.2 10.2 15.3 17.3 17.6 12.3 111.1 MISSION DATA Month/ No. of No. of rate of Year Weeks Persons Manweeks Report Identification 08/79 0.5 2 1.0 10/79 Appraisal 01/80 0.75 3 2.25 02180 Post-Appraisal I 02/80 0.5 2 1.0 Post-Appraisal II 04/80 1.0 1 1.0 04/80 Supervision I 07/80 0.5 2 1.0 Supervisiou II 11/80 1.5 3 4.5 12/80 Supervision III 01/81 0.75 3 2.25 Supervision IV 02/81 1.5 2 3.0 04/81 Supervision V 10/81 0.5 1 0.5 10/81 Supervision VI 03/82 0.5 2 1.0 04/82 Supervision VII 05/82 0.5 1 0.5 06/82 Supervision VIII 09/82 0.5 2 1.0 10/82 Supervision IX 10/82 0.5 3 1.5 11/82 Supervision X 12/82 0.25 2 0.5 01/83 Supervision XI 02/83 0.75 3 2.25 04/83 Supervision XII 05/83 0.25 1 0.25 06/83 Supervision XIII 06/83 0.25 1 0.25 07/83 Supervision XIV 10/83 0.25 1 0.25 10/83 Supervision XV 10/83 0.5 3 1.5 12/83 Supervision XVI 12/83 0.5 2 1.0 12/83 Supervision XVII 01/84 0.25 2 0.5 02/84 Supervision XVIII 10/84 1 10/84 Supervision X.'X 11/84 1.0 2 2.0 11/84 Supervision XX 12/84 0.5 2 1.0 02/85 Supervision XXI 03/85 0.75 1 0.75 04/85 Supervision XXII 05/85 0.75 1 0.75 06/85 Supervision XXIII 06/85 0.25 2 0.5 07/85 Supervision XXIV 08/63 0.25 1 0.25 09/85 Supervision XXV 09/85 2 10/85 Supervision XXVI 12/85 0.75 2 1.5 12/85 Supervision XXVII 03/86 0.5 4 2.0 03/86 Total 34.75 !~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ i~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~  iv PROJECT COMPLETION REPORT HONDURAS PETROLEUM EXPLORATION PROMOTION PROJECT (LOAN 1861-HO) HIGHLIGHTS 1. This was a typical petroleum exploration promotion project and comprised petroleum sector related technical assistance, studies and geophysical prospection. The objectives of the project were: (i) to assess the country's petroleum geology and modernize petroleum legislation with a view to promoting exploration by private oil companies; (ii) to strengthen Government institutions in charge of petroleum affairs and energy in the areas of petroleum technology, petroleum related accounting and auditing, and energy planning. 2. During implementation the loan closing date was extended by two years due to delays in project implementation. The delays were caused mainly by cumbersome and time consuming local procurement procedures, project management weaknesses, and frequent staff changes at project executing agencies. Total project costs were essentially the same as the appraisal estimate. However, this does not offer a meaningful comparison, since the scope of the project experienced significant reductions. A very small portion of the loan (US$ 0.2 million) was cancelled at loan closing date. 3. The project did not meet the goals established at appraisal. Although a new petroleum law was promulgated, it fell short of the requirements. The promotion effort failed to attract serious exploration interest and investments. The results of the training program were also disappointing since the trained staff have been replaced by others. With the exception of the study related to petroleum accounting and auditing, sector studies on petroleum pricing and taxation were not conducted, and no action was initiated in these areas, due to the lack of interest and commitment on the part of the Government. 4. In retrospect, the design of the project could have been improved by a better procurement preparation and provision of a project implementation unit free of political interference. Also there was room for decisive Bank action when it became apparent that the Government was uncommitted to the objectives of the project and unwilling to abide by the rules and procedures established for exploration promotion.  I PROJEC7! COMPLETION REPORT HONDURAS PETROLEUM EX"LORATION PROMOTION PROJECT (LOAN 1861-HO) I. INTRODUCTION 1.01 Honduraa has the second lowest per capita energy consumption in Central America, although total use of energy in the country increased by an average of seven percent annually during the 1970's. At the time of project appraisal, commercially marketed energy represented about 60 percent of total energy consumption. Imported petroleum met about 80 percent of commercial energy requirements and hydropower the remaining 20 percent. By the late 1970's, in the face of increasing domestic demand for energy and higher import prices for liquid fuels, the Honduran Government (GOH) attempted to diversify and increase the supply of domestically produced energy resources. In this context, greater emphasis was placed on hydrocarbons and petr,leum exploration. 1.02 Prior to the project, as Honduras had no domestic petroleum production, all of the crude oil for refining as well as various petroleum products were imported, mainly form Aruba, where a mixture of crudes with a base of Venezuelan oil was prepared to meet the requirements of the 16,000 barrels per day Texaco-owned refinery. As a result, petroleum imports (crude and products) represented a growing burden on Honduras' balance of payments. In 1980, petroleum imports accounted for approximately 13 percent of total imports. The country's total oil import bill rose from about US$26 million in 1973 to approximately US$112.6 million in 1979, or about 15 percent of total merchandise exports. While it was predicted that gasoline consumption would grow at a relatively slow rate, use of diesel and fuel oil were expected to increase relatively rapidly. With expected increases in international petroleum prices in the future, it was estimated that Honduras' petroleum imports in 1985 would approach US$428 million. 1.03 By the late 1970's, the GOH began to attach high priority to the discovery of domestic petroleum resources. Its most promising area, the northeast offshore, had been only lightly explored, and the results of past and then ongoing exploration efforts were inadequate to establish the petroleum potential of the country. Moreover, a discovery of as little as 10,000-15,000 barrels per day would go far towards satisfying Honduras' petroleum requirements. At the same time, the GOH did not wish to risk scarce domestic financial resources in oil exploration. The GOH's plans, therefore, were to pursue a policy of attracting international oil companies to carry out further exploration, provided that on the basis of previously acquired data sufficiently attractive prospects were presented persuasively to potential bidders. The GOH recognized the need for such an approach and, therefore, requested Bank assistance in helping the General Directorate of Mines and Hydrocarbons (DGMH) within the Ministry of Natural Resources (MNR) in compiling and interpreting existing geological and  2 geophysical information, preparing and administering the bidding and negotiating with foreign companies and monitoring their work. It also requelted assistance in establishing the basis for effective energy planning. IT. PROJECT IDENTIFICATION, PREPARATION AND OBJECTIVES 2.01 This project was to support the GOH's efforts (1) to discover petroleum by encouraging foreign oil companies to explore the most promising on- and offshore areas of Honduras, and (2) to improve energy sector planning. The immediate objectives of the project were to: (a) strengthen the capacity of the DGMH in the areas of geology, geophysics and other aspects of petroleum exploration, production processing and transportation; (b) assist the DGW4 In preparing itself for, and in carrying out, a promotion of exploration areas to foreign companies; (c) provide the DGMH with trained staff and technical capability to monitor operating companies; and (d) assist the GOH in priority aspects of e'nergy sector planning through a petroleum pricing and taxation study and a review of studies on alternative energy sources. 2.01 At appraisal, the project consisted ofs (a) Technical Assistance to the DGMH The project was to provide a total of 108 man-months of consultants to the DGMH. Geophysical consultants were to assist in the organization of geophysical data and related activities to facilitate information access and analysis by the GOH and inte:ested oil companies. The petroleum exploration consultants were tot i) organize and interpret surface and subsurface infortation, ii) undertake special studies where required, iii) assist w,th preparation of evaluation reports and bidding documents on areds to be offered for exploration and evaluation of proposals by oil companies, iv) assist in the evaluation of proposals submitted by oil companies and provide help in contract negotiations and monitoring of company work commitments, v) train competent staff in the foregoing activities, and vi) provide assistance in oil accounting and auditing procedures and perform specialized studies which might be required as a result of the findings by the geological and other consultants. Finally, the consultants and an international legal firm would review the current petroleum law and provide assistance in making necessary revisions to better  3 protect the interests of the country, while at the same time providing adequate incentives to attract foreign oil companies; (b) Training The project was to provide training for key management personnel of the DGMH and its professional sraff in: petroleum exploration techniques, laboratory procedures and related activities, through seminars, on-the-job training, and intensive courses abroad; tc) Computer Processing This component was to provide for processing of (i) previously acquired seismic profiles in order to improve offshore geologic interpretations and (ii) landsat remote sensing imagery as well as transferring seismic lines data on magnetic tapes; td) Eauipment The project was to provide office and laboratory equipment and materials, including storage files for geological data, technical books, magnetic tapes, special copying machines for logs and profiles and a telex machine; and te) Sector Studies Approximately 12 man-months of consultant assistance were to be provided for two energy planning studies. The first would review the then current petroleum pricing and taxation situation, with a view towards advising the GOH on policies in this area. The second was to review the status of ongoing GOH studies on alternate energy sources, with a view towards evaluating them on the basis of comparative cost effectiveness. 2.02 The subject project was identified in August 1979 and was appraised in January 1980. Negotiations took place on April 23-24, 1980. On May 29, 1980, the Executive Directors approved a loan of US$3 milliont. The loan was signed on June 23, 1980. The original Closing Date was December 31, 1983. This date was extended twice. The final Closing Date was December 31, 1985. Project costs, as presented in the combined President's and Staff Appraisal Report, are shown on Table 1 of this report.  4 III. PROJECT LMPLEMENTATION A. Prolect Initiation 3.01 After minor delays, loan effectiveness took place on October 3, 1980. Shortly thereafter, a Project Unit was established within the DGMH. An approximately twco year delay occurred in the procurement process,as a result of a number of problems. These included: an unfamiliarity with Bank and GOH procurement regulations by officials responsible for the project within the GOH agencies, repeated changes of these officials for political reasons, cumbersome anproval processes for awarding contracts (prior to signature), slow decision making by these officials and lengthy negotiationa of proposed contracts. Further delays were encountered after the consultant contracts were sigred, primarily caused by the lengthy review and approval procedures by the Presidency and the Congress, as required by Honduran law. The PGMH, a directorate of the MNR, was tne principal executing agency, while the energy planning studies were to be supervised by the Ministry of Economy (price/taxation) and the Economic Planning Council (CONSUPLANE) (alternative energy sources). All procurement was performed according to standard Bank guidelines. B. !Poject Execution Mi) Technical Assistance to DGMH (a) Data Processing 3.02 The first subcomponent of the project was to allow for the organization, compilation and interpretation of geological and geophysical information as well as for the performance of related studies. On May 6, 1982, a contract was signed with the consultants to be responsible for the above. The contract became effective in August of the same year. 3.03 The consultants made substantial progress and, as per agreement, sub-contracted additional firms to perform studies deemed essential for assessing Honduras' hydrocarbon potential, including various studies which were not anticipated at appraisal. Studies performed included: geochemicaL., radiometric, and offshore seismic studies. As a result of the above studies, it became clear that significant errors in previous surface geological mapping had been committed. Two additional studies were performed: an aeromagnetic survey and the processing and interpretation of selected offshore seismic data. These studies experienced a delay of approximately three months due primarily to the failure of the consultants to locate an insurance company willing to post a performance bond, as required under the contract signed with the GOH. 3.04 Thnugh the initial work performed by this consultant firm which was a subsidiary of a large oil company, was initially of satisfactory quality, it must be noted that later (mid-1983) the firm moved away from consulting as decided by its parent-company. To honor its I  5 contract with the DGMH, this company maintained a reduced unit for work on the project and employed independent consultants unforeseen at appraisal. As the motivation and the number of qualified personnel of this comrany diminished, it became necessary to negotiate with another firm (one that worked in conjunction with the company which performed the aeromagnetic survey) to organize three petroleum promotion seminars (and produce relevant documentation) which were designed to attract foreign oil companies and to offer Zor sale the technical materials produced under the contract. Promotional presentations to the international oil industry were offered in October 1985 in Houston, London and Tokyo. Though some interest was shown by the major oil companies present, up to the present time no contract for petroleum exploration has been signed. 3.05 Independent of the promotional process described above, an exploration contract was signed in November 1985 by the GOH with a small company, which has since forfeited its corporate charter as a result of its failure to pay local taxes in Texas. The signature of this contract, which involved prime, previously unexplored areas, raised concern on the part of the Bank, as well as the major oil companies that had been invited to bid for the exploration contracts because : a) the company's small size and lack of sufficient resources to perform the exploration work as specified under the contract should have disqualified it; b) the company did not purchase the background documentation as required under the guidelines established for bidding at the time of the promotional campaign; and c) essential elements of any normal exploration contract, such as specific technical commitments and GOH's right of approval regarding annual minimum work obligation, were not covered under the scope of the contract. After review, the Bank staff felt that the contract was an inadequate adaptation of the Model Contract which, itself, was never finalized to the Bank's satisfaction. All of these factors led the major oil companies, as well as the Bank, to questio3 GOH's seriousness of purpose regarding petroleum exploration. Representatives of several companies have cited this as an important factor in their loss of interest in bidding for exploration contracts; as mentioned above, no other contracts have as yet been signed (Para 3.04). It should be noted that the Borrower attributes this lack of enthusiasm to the drop in international oil prices. (b) Legislative Review 3.06 The second major subcomponent was the review of the legislative instruments of the Borrower for the petroleum sector and preparation of a model contract and model bidding procedures, the purpose of which being to better protect the interests of the country while at the same time attracting foreign oil companies to participate in exploration and production activities in Honduras. After some initial changes regarding the procedures for contracting of a legal consultant, the contract with the chosen firm was signed in October 1982. With the timely completion of the proposed work in mind, the consultants began work prior to official GOH approval.  6 3.07 By early-1983, the legal consultants completed a preliminary review of the then-existing petroleum law and regulations and presented drafts of the revised law and of a model concession contract. After review by the GOB, the exploration consultants and the Bank, it was determined that the draft law had to be simplified so as to effectively attract the oil companies as desired. The legal firm agreed to v Ice any and all desired changes, however, it stated that additional fees fo. its services would be required, as well as payment of outstanding invoices. The DGMH indicated that it was unwilling to review the contract amount re..ated to services already covered by the terms of reference. Furthermore, the DGMH objected to the firms invoices covering the period from December 1982 through February 1983. In addition, the DGMH attributed non-payment of other iuvoices to the failure of the firm to post performance bonds, as required by local procurement regulations. 3.08 'While the dispute between the DGMH and the legal consultants continued, the Latin American Energy Organization (OLADE) presented a new version of the hydrocarbons law, which wai offered free of charge. OLADE's assistance was sought by the DGMH in November 1982, one month after the contract was signed with the legal consultants (Para 4.04). The OLADE draft which placed great emphasis on protection of national interests and provided inadequate assurances to potential explorers who would be undertaking considerable risk, neither included the original legal consultants'work nor previous Bank observations. However, after some modifications, and amendments following the initial GOH approval, as recommended by the Bank, the amended OLADE version was approved by the GOH. The regulations and a model contract were drafted by a company sub- contracted by the petroleum exploration consultants. by mid-1985. it was determined that the legal framework established was adequate to permit bidding and negotiations to proceed. (c) Negotiation Procedures 3.09 The third subcomponent of the project consisted of the review of the procedures for negotiation of oil concessions with oil companies and monitoring their work. This study was was undertaken as planned. The consultants alno prepared guidelines to facilitate negotiations with the oil companies. (d) Accounting and Auditing System 3.10 The final subcomponent was the establishment of a modern petroleum accounting and auditing system for the DGMH. The contract with the chosen consultants was signed and became effective September 13, 1982. By mid-1983, the accounting consultants had prepared a complete petroleum accounting menual and an auditing manual. After the DGMH and Bank review, it was determined that the work presented was mainly directed towards the activities of a national oil company, and that it was necessary for the consultants to reorient their work towards a more simple set of procedures that would allow the DGMH to monitor properly the exploration and possible production activities to be conducted by private international oil  7 companies and establish only general guidelines for their auditing. The consultants accepted the recommendations and performed the work at no extra cost. It was also decided that the consultants would provide a minicomputer program to allow for the monitoring of oil companies'activities. The resulting work was of high quality. The consultants then presented one seminar in Tegucigalpa regarding the two procedural manuals produced and discussed their implementation. Despite the excellent work performed by the accounting consultants, the desired accounting and auditing system was never implemented, as it would appear that the DGMH lacked the qualified staff Zo do so (Para 3.11). The Borrower attributed this failure to the fact that only one seminar was offered, and this served only to review the information presented in the manuals. (ii) Training 3.11 This component consisted of the training of the DGMH staff in the areas of: a) accounting and administration for the petroleum exploration promotion program; b)petroleum exploration and petroleum engineering procedures; c)geological explorations emphasizing geochemistry and interpretation of data; d)basic introduction to the petroleum industry for non-geologist professionals; and e)geology and geophysics, as applied to petroleum exploration. All of the training needs identified at appraisal were carried out, with the exception of the training abroad for an economist and an accountant. Despite the in-depth training provided, the DGMH benefited little, as a result of constant changes of personnel within the organization. At this point, none of those trained under the project remain in the DGMH. It is possible that for this reason, the programs designed by the accounting consultants were never implemented. (iii) Computer Processing and Equipment 3.12 Both of these components were completed as envisaged at appraisal. The computer processing was performed successfully, including the Landsat remote sensing. Nevertheless, after preliminary examination of the material to be analyzed, it was determined that the scope of the this component could be made more cost effective by limiting the data to be reviewed, as determined by an initial assessment of the previously collected information. The acquisition of an office and laboratory equipment for the DGMH was also completed successfully. (iv) Sector Studies 3.13 This component was to provide for the hiring of consultants to perform: a) a study and evaluation of the Borrower's pricing and taxation practices; and b) a study to review alternate energy sources for meeting the Borrower's future needs in the energy field. Neither of the studies was undertaken. 3.14 The pricing and taxation study was to be implemented by the' Ministry of Economy. After long periods of procrastinatien on the part of this government organization, it was decided that this study would not be performed. The reason for the cancellation for this subcomponent was  8 apparently a lack of interest on the part of the executing agency. 3.15 The study of alternate energy sources was to be administered by CONSUPLANE. Again, after going through the motions of procurement througi mid-1985 and having already selecting a consultant firm to perform the work in question, CONSUPLANE determined that the study was to be cancelled. Although CONSUPLANE indicated that this study was no longer necessary, as several similar studies to be performed, including one by OLADE, the proposed terms of reference had been previously revised to analyze the most viable options, and thus, to avoid overlap. IV. PERFORMANCE OF THE BORROWER l 4.01 At the time of project appraisal, the international oil market I was experiencing its second major boom in ten years. The price of oil was high and there was every indication that it would continue to rise. It is in this context that the Petroleum Exploration Promotion Project was undertaken. The GOH, as reflected by the Ministry of Natural Resources in general and the DGMH specifically, placed high priority on the discovery of petroleum resources and the development of petroleum production. By early- 1982, however, the price of petroleum on the world market fell. With it, it would appear, fell the GOH's motivation to pursue the project's objectives. The desire to reach the goals initially established under the project seemed lost, as seen in the resultant actions of the government organizations involved. 4.02 The the DGMH's performance, in whose hands the primary responsibility of the project's success lay, deteriorated. As indicated in paragraph 3.01, there occurred a delay of approximately two years in implementing the project. Though the governmental procedures exacerbated the situation, the primary cause for this was inefficiencies within both the DGMH and the MNR, that included inexperienced officials, as well as weak decision-making mechanisms. Frequent personnel changes within the two organizations prevented the contact and training with more experienced and knowledgeable consultants from having any major influence on the decisions of the DGMH. Auditing procedures of the DGMH in particular also were frequently cited by the Bank as a problem which hindered successful project execution. 4.03 It would appear that GOH authorities actually undermined the success af the project with its direct negotiations and eventual signing of a exploration contract (by the Deputy General Attorney) with a firm that was not well suited for handling such a contract. As a direct result of this, as mentioned in paragraph 3.05, skepticism developed among the major oil companies, as well as within the Bank. The Bank staff supervising the project attempted to point out the problems within the contract itself, and drafted a Memorandum of Understanding requiring the Minister of Natural Resources' signature. The purpose of this was to ensure GOH compliance with the originally established guidelines for negotiations. As signature of this Memorandum was a requirement for a final extension of the closing  9 date, and as this was never signed by the Minister, no further extension was granted. 4.04 The DGffH's performance with respect to the legislative modifications outlined in the Loan Agreement was also of a less-than satisfactory nature. While on one hand negotiating, and thereafter signing a contract with the Legal consultants mentioned in paragraphs 3.06-3.08, the DGMH was simultaneously negotiating with OLADE to perform the same work at no cost. The Bank was only informed of this situation after the original consultants presented their draft. Though explained to the Bank as another resource, the negotiations with OLADE again bring into question the DGMH's commitment to the work covered under the scope of the project. Regarding the original consultant firm, the DGMH withheld payment of various invoices presented by the law firm, attributing this to the firm's failure to post the required guarantee, as well as the fact that the DGMH disputed several of these. V. PERFORMANCE OF CONSULTANTS 5.01 As discussed in Section III of this report, there were three major consultants responsible for the execution of this project. The first was the firm to supervise the data processing and geological-geophysical studies of the subcomponent for technical assistance to be provided to the DGMH. This firm initially performed satisfactorily, both with its own staff, and through the use of subcontracted consultants. As mentioned in paragraph 3.04, the interest of this firm with respect to the project appeared to diminish in mid-1983, as a result of corporate decisions of its parent-company, and as a result, its performance deteriorated. The company thereafter broke-away from its parent-company, and merged with two other former subsidiaries. 5.02 The legal consultants contracted to amend the Petroleum Law and regulations performed their duties in a manner that was not considered satisfactory either by the DGMH or by the Bank, though there was some thought within the Bank that the work performed did essentially remain within the outline established by the terms of reference. 5he result of the consultant firm's labors did not fit the needs of the DGMH in that it was determined that the revised law remained too cumbersome. As the DGMH was unwilling to agree to the consultants' request for additional funds, a draft prepared by OLADE, free of charge, was adopted. As the consultants never posted the required performance bond, the DGMH legally had no further responsibility. 5.03 The consultants hired to design the Accounting and Auditing System performed their responsibilities in both a timely and satisfactory manner. Although it was also necessary to simplify the materials produced, this was carried-out very successfully. 5.04 As the original consultants contracted to present the promotion seminars were not adequately staffed to perform the work required, a second consultant firm was hired to prepare a summary of the  10 work performed under the project, as well as to carry-out the subsequent presentations. The work performed was considered of high quality by all involved. VI. PERFORMANCE OF THE BANK 6.01 The Bank's role in the project could have been improved in several respects. First, as indicated in paragraph 3.03, additional studies were required for successful analysis of the country's petroleum potential. Though anticipation of most of these studies at appraisal would have been difficult, it would have been possible to foresee some of these studies, such as the aeromagnetic survey. Perhaps a more careful analysis at appraisal would have led to more realistic cost figures. Supervision of the project was adequate, however, the supervision reports tended to downplay the problems and as a result led to a Bank view of the project that was unrealistic. Though ratings of 'major problems" (3's) were listed originally, supervision reports soon led to the impression that the project was being more successfully executed than it actually was. The clearest indication of this tendency was the ratings given to consultants performance. Though there were serious problems involving the consultants, ratings of "problem-free' (or 1's) are found throughout the supervision reports. 6.02 Regarding the motivational factors within the GOH, and in particular within the DGMH, the Bank might have been well advised to reassess the potential for success of such a project, in light of the changes that had occuried. In doing so, it is conceivable that the option of loan cancellation should have been considered. If this option is excluded, there remains no doubt that the Bank should have applied more pressure to ensure a depoliticized project unit, and thus allow for a more efficient use of Bank funds, especially under the training component. The two studies under the control of the Ministry of the Economy and CONSUPLANE should also been placed under the control of the project unit, so as to at least ensure the same level of motivation for all aspects of the project, as well as to allow for greater monitoring by Bank staff. The role played by the Bank staff involved improved significantly towards the end of the project. As the GOH's performance deteriorated after the presentations, i.e. the signing of the contract with the exploration company with insignificant funds to perform the work contracted, the Bank took firm actions to give the GOH the opportunity to improve the trend of the project. This was done by requiring a Memorandum of Understanding (Para 4.03) as well as an agreement on the part of the GOH to follow established bidding standards, namely International Competitive Bidding. As the GOH appeared unwilling to pursue the original objectives of the project, no additional extension was granted and the project closed.  11 VII. PROJECT COSTS AND DISBURSEMENTS 7.01 As indicated in Table 1, the total estimated project cost of US$3.7 million was higher than the actual cost of US$3.0 million. This reduction in cost came as a result of the decision not to proceed with the two sector studies envisaged at appraisal [(Para 2.01 td)], compoundted with the slight reduction in scope of the Computer Processing component. The act'sal cost for this component of US$295 thousand fell below the estimated cost of US$490 thousand. The total cost of the largest component, namely the technical assistance to DGMH, was US$2.5 million, slightly below the US$2.7 million estimated cost. As discussed in paragraph 3.03, additional expenditures were required for this component. However, costs were covered by the funds unallocated at appraisal. All other components remained within the cost levels established at appraisal, though some minor differences did occur. 7.02 Total Bank disbursements were US$2.8 million, as compared with the estimated total of US$3.0 million. Again, the difference between the two figures can be attributed to the factors indicated above. The remaining US$200,000 was cancelled. It must be noted that neither the Bank cost nor disbursement figures coincide with those of the Borrower's. VIII. CONCLUSIONS 8.01 The project was initially well designed. The project goals were clearly defined, and indeed, it would appear that these were appropriate for the conditions of the country at the time. The project had serious problems initially with procurement, and it would perhaps have been advisable for the Bank to have sought agreement on these matters during project preparation and pcoject negotiations. Nevertheless, once initiated, the project appeared to be moving in the right direction. Consultants were hired and the goals remained in sight. Within a short time, however, the situation changed. The price of oil fell, and with it, the perceived need by the GOH to promote petroleum exploration. Furthermore, political changes made within the organizations involved served to counteract the effects of the training component which was indeed essential for successful project implementation. 8.02 In reviewing the original objectives of the project, as listed in paragraph 2.01, it would appear that the Petroleum Exploration Promotiot. Project did not meet the goals outlined at appraisal. Closer monitoring by the Bank staff would have indicited this and led thc Bank to change its plan of action. This project indicates that through supervision, trends of project implementation must be taken into account wher. Bank decisions are taken. Furthermore, the Bank should not simply observe without providing insight to the Borrower regarding the direction of the project, and ir, turn, progress in achieving the goals set forth at appraisal. When it is  12 evident that the Project has indeed strayed from its chosen course, serious consideration must be given to the change in scope of the project.  13 Tablo I Project Cos Estimated Cost /1 Actual Coots /2 percentage Cemponats LocaI Foreign Total Local Foreign Total Dlftfronce 1. Techniel Assistance 63.0 2,e97.9 2,0S. 17n.o 2,825.0 2,6U2.0 -6.91 to ODM 2. Training 2t.0 J5.9 6J.0 0.0 68.0 63.0 6.0S 8. Computer Processing a 692 592.0 a 296 295.9 -U1.21 4. Enuipmsnt 87. 1M0.0 167.0 0.6 116.0 116.0 -89.51 5. Sector Studie 25.0 14*.0 171.0 9.0 6.0 9.0 -100.01 TTAL e60.0 $,eo 60. 0 am.e 177.0 2,700.J 2,976.0 -18.53 /I Prices Includo contingencIn. /2 Differences exist between flnk and Borrover cot figures.  14 ANNEX 1 rage i of 4 CONMENTS FROM THE BORROWER (Unofficial Translation) SECRETARIAT OF General Directorate of NATURAL Mines and Hidrocarbons RESOURCES June 7, 1989 Mr. Ricardo Halperin Division Chief of Operations of Infrastructure and Energy World ~-nk, 1818 H St., N.W. Washi.., n D.C. 20433 U.S.A Dear Mr. Halperin: In reference to the Project Completion Report for the Petroleum Exploration Project (Loan 1861-HO), received on May 19 of this year, we forward the following comments: 1. We do not agree that the lack of enthusiasm of the oil companies to invest in our country was partially or totally due to the oil exploration contract subscribed betweer the Government of Honduras and the Hond-Tex, since as you would understand, the