Peru - Petroleum Production Rehabilitation Project

Document of The World Bank FOR OFFICIAL USE ONLY Repern No. 7944 PROJECT PERFORMANCE AUDIT REPORT PERU PETROLEUM PRODUCTION REHABILITATION PROJECT (LOAN 1806-PE) JUNE 30, 1989 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. COUNTRY EXCHANGE RATES (Inti/US$) Appraisal Estimate US$1.00 - 0.225 Actual 1980 - 0.288 1981 - 0.422 1982 = 0.698 1983 - 1.629 19r4 = 3.467 1985 =10.967 1986 =13.949 1987 =16.839 ACRONYMS AND ABBREVIATIONS Bbls - Barrels of 42 US gallons BCF - Billion cubic feet BOPD - Barrels of oil per day COFIDE - Corporacion Financiera de Desarrollo (Financial Development Corporation) ELECTROPERU - National Power Generation and Distribution Company EPF - Empresa Petrolera Fiscal (State Oil Company) ERR - Economic rate of return FRR - Financial rate of return GOP - Government of Peru GW - Gigawatt (million kilowatt) IPC - International Petroleum Company MBPD - Thousand barrels per day HEM - Ministry of Fnergy and Mines MW - Megawatt (thousand kilowatt) PCR - Project Completion Report PETROPERU - Petroleos del Peru (National Petroleum Company) PPAM - Project Lerformance Audit Memorandum PPAR - Project Performance Audit Report SAR - Staff Appraisal Report TOE - Tons of oil equivalent (10.816 x 106 Kcal) FISCAL YEAR January 1 - December 31 THE WOLD BANK FOR OFFICIAL UK Ony WAShmgton. C 20433 USA Oikfre otDew-aw<ael Opeatsess fvdhatmn June 30, 1989 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Performance Audit Report on Peru Petroleum Production Rehabilitation Project (Loan 1806-PE) Attached, for information, 's a copy of a report entitled *Project Performance Audit Report on Peru - Petroleum Production Rehabilitation Project (Loan 1806-PE)l prepared by t erations Evaluation Department. Attachment This document has a res.ricted distribution and may be used by recipients only in the performance of their omcial duties. Its contents may not otherwise be disclosed without World Bank authorization. FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT PERU PETROLEUM PRODUCTION REHABILITATION PROJECT (LOAN 1806-PE) TABLE OF CONTENTS Page No. Freface ..................................................... .i Basic Data Sheet ............................................ii Evaluaticn Summary .......................................... v PROJECT PERFORMANCE AUDIT HORANDUM I. BAC'KGROUND 1..........................................1 Introduction ....................................1 Project Objectives ......................................... 2 Project Description ........................................ 2 Rationale for Bank Involvement ..................2 II. IMPLEMENTATION EXPERIENCE ...........................3 Project Implementation ..........................3 Project Preparation .............................4 Performance of the Bank .........................6 Performance of the Borrower ......................6 III. PROJECT OUTCOME ......................................6 Achievement of Project Objectives 6 Economic Performance .............................10 IV. FINDINGS AND ISSUES ..................................11 Overall Assessment ...............................11 Sustainability ...................................11 Lessons of Experience ............................12 ATTACHMENT 1. Comments from the Borrower and Bank Reply 13 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. Table of Contents (Cont'd) Page No. PROJECT COHPLETION REPORT I. Introduction ......................................28 II. Project Preparation and Appraisal Objectives 31 III. Project Implementation and Hanagement 36 IV. Institutional Performance .........................42 V. Financial and Economic Performance. 43 VI. Conclusions .......................................46 PCR ANNEXES 1. PERU: Crude Oil Production ....................49 2. PERU: Petroleum Volume Balance 50 3. Project Costs .................................51 4. Schedule of Disbursements .....................52 5. PETROPERU: Key Financial Indicators 53 6. PETROPERU: Financial Ratios 54 7. PETROPERU: Balance Sheet ......................55 8. PETROPERU: Income Statement 56 9. Glossary of Technical Terms 57 MAP IBRD No. 14471 i PROJECT PERFORMANCE AUDIT REPORT PERU PETROLEUM PRODUCTION REHABILITATION PROJECT (LOAN 1806-PE) PREFACE 1. This is a Project Performance Audit Report (PPAR) on the Petroleum Production Rehabilitation Project, involving an IBRD loan in the amount of US$32.5 million to Petroleos del Peru (PETROPERU), with the objective of assisting the country's petroleum development program. The loan was approved on March 11, 1980, and became effective on September 30, 1980. US$2.3 million of the loan amount was cancelled on November 5, 1985 at the request of the Borrower. 2. The PPAR consists of the Project Performance Audit Memorandum (PPAM) prepared by the Operations Evaluation Department (OED) and the Project Completion Report (PCR) prepared by the Latin America and th!e Caribbean Regional Office. The PPAM is 'wased on the attached PCR, the Borrower's PCR, the Staff Appraisal and the President's Reports, the loan documents, the transcripts of the Executive Directors' meetings at which the project was considered, on a study of project files, and on discussions with Bank staff. 3. The PCR provides a complete account and assessment of the project experience, and discusses the performances of the Bank and the project executing agency. The PPAM elaborates on particular aspects of project implementation, the design and definition of the project and the achievement of project objectives. 4. Following standard OED procedures, copies of the draft PPAR were sent to the Government and the Borrower. The comments received from PETROPERU are reproduced as an Attachment to the PPAR and incorporated in the report as appropriate. ii PROJECT PERFORMANCE AUDIT REPORT PERU PETROLEUM PRODUCTION REHABILITATION PROJECT (LOAN 1806-PE) BASIC DATA SHEET KEY PROJECT DATA Appraisal Actual or Item Expectation Current Estimate Total Project Cost (US$ million) 50.7 48.7 (Under)/Overrun (Z) - (4) Loan Amount (US$ million) 32.5 32.5 Disbursed '2.5 30.2 Cancelled - 2.3 Date for Completion of Physical Components 12/82 08/85 Proportion of Time Overrun (2) - 90 /a Economic Rate of Return (Z) 100+ 100+ Financial Rate of Return 21-100 n.a /b Institutional Performance Satisfactory Unsatisfactory CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS (US$ million) As of June 30, 1981 1982 1983 1984 1985 (i) Appraisal Estimate 4.0 28.5 32.5 32.5 32.5 (ii) Actual - 9.5 21.0 26.2 30.5 (iii) (ii) as I of (i) 0 33.3 64.6 80.6 94.0 /a From loan effectiveness to project completion. /b~ Not availabls. PROJECT DATES Original Plan Actual First Mention in Files 12/26/78 Government's Application 12/29/78 Preappraisal/Preparation 05/16/79 Appraisal 06/22/79 Negotiations 01/22/80 Board Approval 12/00/79 03/11/80 Loan Agreement Date 04/28/80 Effectiveness Date 05/31/80 09/30/80 Closing Date 2/31/83 08/31/85 STAFF INPUTS (Staff-Weeks) Bank FY 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 Total Preappraisal 21.6 21.6 Appraisal 6.7 41.8 48.5 Negotiations 22.9 22.9 Supervision 10.4 40.8 12.7 16.5 21.8 17.7 9.1 5.8 2.7 137.5 Other 5.4 0.5 0.2 0.2 _ 6.3 Totals 33.7 75.6 41.0 12.7 16.7 21.8 17.7 9.1 5.8 2.7 236.8 iv MISSION DATA Month/ No. of No. of Date of Year Weeks Persons Man-veeks Report Identification 02/79 2.4 5 12.0 03/19/79 Preparat';. 04/79 0.6 3 1.8 05/16/79 . Appraisal 05/79 3.4 4 13.6 06/22/79 Post-Appraisal I 08/79 1.0 4 4.0 02/23/79 Post-Appraisal II 11/79 1.0 3 3.0 11/23/79 Post-Appraisal III 12/79 1.0 1 1.0 12/28/79 Supervision I 05/80 3.0 2 6.0 05/20/80 Supervision II 09/80 3.0 2 6.0 10/24/80 Supervision III 12/80 3.5 4 14.0 01/28/81 Supervision IV 06/81 1.2 1 1.2 07/01/81 Supervision V 02/82 2.4 3 7.2 03/24/82 Supervision VI 06/82 2.4 3 7.2 07/15/02 /c Supervision VII 02/83 2.2 2 4.4 03/04/83 Supervision VIII 06/83 3.4 3 10.2 07/06/83 Supervision IX 11/83 3.4 3 10.2 11/28/83 Supervision X 06/84 4.2 6 25.2 07/31/84 Supervision XI 03/85 2.0 5 10.0 07/07/85 Supervisioi XII 02/86 2.2 6 13.2 03/19/86 Total 150.2 /c Supervision missions VI-XII also include time spent in supervis4ng Loans 2117-PE and 2195-PE. OTHER PROJECT DATA Borrower Petroleos del Peru (PETROPERU) Executing Agency PETROPERU Fiscal Year of Borrower January 1 - December 31 Follow-on Projects Petroleum Refinery Engineering Proj:ct (Loan 2117- PE), approved on March 25, 1982; Petroleum Production Enhancement Project (Loan 2195-PE), approved on August 10, 1982. v PROJECT PERFORMANCE AUDIT REPORv PERU PETROLEUM PRODUCTION REHABILITATION PROJECT (LOAN 1806-PE) EVALUATION SUMMARY Introduction 1. The Petroleum Production Rehabilitation Project was the Bank's first operation in Peru's petroleum subsector, and supported the Government's efforts to restructure the sector policies and to strengthen the national oil company (Petroleos del Peru (PETROPERU)) (PCR, paras. 2.08-2.09; PPAM, p&ra. 4). It comprised two petroleum production rehabilitation components, seismic surveys, studies, and technical assistance (PCR, paras. 2.10-2.17; PPAM, para. 5). The project was implemented by PETROPERU with assistance from international consultants. Objectives 2. The principal objectives of the project were to increase PETROPERU's crude oil production, to revitalize its technical and financial capabilities, and to assist the Government to elaborate the required policies and incentives to fully develop Peru's hydrocarbon potential (PCR, para. 2.07; PPAM, para. 4). Implementation Experience 3. The project experienced long delays due mainly to di7ficulties arising from inadequate project preparation and implementation, including procurement, and later from natural disasters (PCR, paras. 3.01-3.17; PPAM, paras. 8-17). The number of reactivated wells and the amount of seismic surveys were less than planned (PCR, paras. 3.07-3.08, and 6.01; PPAM, para. 8). The reported cost of the project was approximately 5? below the original forecast. However, when allowance is made for the shortfall in the number of rehabilitated wells and the length of seismic surveys, a cost overrun on the order of 6Z is indicated (PCR, para. 3.17; ?PAM, para. 8). Because of the slow pace of project implementation, the disbursement of the Bank loan took five years, instead of three years as originaily planned. The unused portion of the Bank loan (US$ 2.3 million) was cancelled at the request of the Bor- rower (PCR, para. 3.20, and Knnex 4). Results 4. Despite long implementation delays, PETROPERU reached its petroleum production targets on time. Production increase from the rehabilitated fields has exceeded appraisal estimates (PCR, paras. 3.02, 3.04, and 6.02(a); PPAM, para. 21). Several useful studies were prepared under the project. These vi have enabled PETROPERU to initiate a petroleum production enhancement project aad improve its organizational structure, investment planning, accounting and financial management practices (PCR, paras. 3.10-3.13, and 6.02(c); PPAM, paras. 22-23). Training and technical assistance for the treasfer of modern petroleum engineering technology have been tatisfactory (PCR, para. 4.02; PPAM, para. 23). However, the project's institutional objectives were only partially achieved. PETROPERU's financial situation worsened; it failed to achieve the required operational autonomy; and its technical cadres remained in need of strengthening at the completion of the project (PCR, paras. 5.01- 5.06, 6.04(b),and Annex 6; PPAM, paras. 24-28). The policy objectives of the project remained elusive due mainly to unexpected economic and political developments in the country (PPAM, paras. 32-35). The economic rates of return of the two revenue earning components of the project were as high as originally forecast because of the incremental nature of these investments (PCP, para. 5.07; PPAM, paras. 36-37). Sustainability 5. The sustainability of the economic benefits derived from the project appears to be assured (PPAM, para. 39). Find..ngs and Lessons 6. Overall, despite the limited success in achieving its institutional and policy objectives, the project is considered successful. It has con- tributed co PETRC"ERU's institutional strengthening, enabled broad-based policy dialogue v th the Government, and resulted in a rapid increase in oil production (PPAM, para. 38). In retrospect, there was room for improvement in project preparation (PPAM, paras. 11-17). The project experience illus- trates the difficulty of designing and implementing sector policy adjustment in the m.idst of economic crisis (PPAM, paras. 29-31). The lessons drawn from the projjct experience may be summarized as follows: (i) rigorous project preparation is of critical importance for satisfactory implementation (PPAM, para. 40), (ii) in designing project implementation arrangements, the project environment and the project entity's corporate culture should be given careful consideration (PPAM, para. 41); and (iii) the terms of reference of essential studies which may involve political sensitivities should be formally agreed to early in the project cycle, preferably before committing the Bank to a project (PPAM, para. 42). 1 PROJECT PERFORMANCE AUDIT MEMORANDOM PERU PETROLEUM PRODUCTION REHABILITATION PROJECT (LOAN 1806-PE) 1. BACKGROUND Introduction 1. The Petroleum Production Rehabilitation Project was the Bank's first operation in Peru's petroleum subsector. At the time the project was prepared (1979) Peru's proven and probable petrolium reserves were approximately 1 billion barrels, representing a tight reserves-to-production ratio of 12 yea-s. Exploration activity had fallen off sharply since 1976 due to both technical and political reasons. Technically, the most promising area f,r petroleum exploration (the Amazon region) was found to have a far more complex geological structure than first envisaged. Politically, the Government's vacillating attitudes towards foreign oil companies --ranging from outright expropriation in 1968 to the vanguard 50-53 production sharing contracts of the early 1970s-- had caused most companies to adopt a go-slow stance to new exploration ventures. 2. Although Peru was experiencing a recent production surge as a result of coming on stream of the oil discoveries in the Amazon region, this con- cealed a number of structural weaknesses and policy concerns elsewhere in the sector. Chief among them were the financial difficulties of Petroleos del Pe,u (ETROPERU), the national oil company, and the lack of a coherent stra- tegy for attracting foreign exploration capital.1/ 3. The Bank held the view that the Government's strategy in addressing Peru's future energy needs had to focus on ways to increase petroleum produc- tion through exploration and development while at the same time testraining the growth in demand for petroleum. As Peruvian exploration would require more resources and technical expertise than the Government could provide during the next decade, this would require a policy that would at,ract sub- stantial amounts of risk capital over an extended period from foreign oil companies. Nevertheless, the Bank staff were convinced that Peru's best interests would be served by the presence of a strengthened, rather than visibly weakened, national oil company. 1/ The background against which the project was prepared is described in detail in Sections I (paras. 1.01-1.03) and II (paras. 2.01-2.08) of the Project Completion Report (PCR). 2 Project Objectives 4. The two main objectives of the project were: (i) revitalizing PETROPERU's technical and financial capabilities, and (ii) helping the Govern- ment to elaborate the required blend of policies and incentives to fully develop Peru's hydrocarbon potential (PCR, para. 2.07). This was to be achieved through a project package aiming at, first, bringing about a rapid increase in PETROPERU's crude oil production; second, strengthening PETRO- PERU's extremely weak financial situation by helping establish a framewc-k in which PETROPERU would be allowed a greater degree of financial autonomy than prevailed at the time; and, third, encouraging the growth of exploration and development activity by advising the Government on important policy matters having a bearing on the investment climate in the sector. Project Description 5. A detailed description of the project components appears in the PCR (paras. 2.10-2.17). Essentially, the project consisted of two petroleum production rehabilitation components, seismic surveys, technical assistance, and a series of studies aimed at bringing viable solutions to critical issues facing the Peruvian petroleum sector, namely, the financial difficulties of PETROPERU, pricing policies applied to petroleum products, and the optimal institutional framework for the sector (President's Report, para. 64). Rationale for Bank Involvement 6. The physical components of the project involved routine oil field operations, such as installing pumps and flow lines, and managing seismic surveys conducted by specialized service companies. The Bank's contribution on these components of the project would amount only to a quick response to PETROPERU's financing needs at a crucial timte. However, through this action, the Bank expected to be in a position to establish an effective dialogue with the Government on a number of sectoral policy matters affecting the future development of the sector, such as exploration incentives for new contract areas in the Amazon region, defining more precisely the activities of private oil companies, and domestic pricing of petroleum products (SAR, para. 2.39). 7. PETROPERU was chosen as the borrower of the Bank loan on the assump- tion that, if the loan was made directly to PETROPERU, the question of the Borrower's creditworthiness would become a central issue and the Bank's ability to press Central Government to take action on a number of critical policy matters affecting PETROPERU's creditworthiness (petroleum products pricing, taxation, and the role of PETROPERU in the sector) wjuld be con- siderably enhanced. 3 II. IMPLEMENTATION EXPERIENCE Project Implementation 8. The project was implemented with an overall delay of 32 months, and essentially within the original budget (PCR, paras. 3.01-3.17). 2/ The PCR attributes implementation delays to (i) slow start due to project complexity and poUtical developments in Peru, (ii) natural disasters, and (iii) procurement difficulties. 9. As mentioned previously (PPAM, para. 6), the physical components of the project which experienced the longest delays consisted of routine oil industry operations, which either PETROPERU had been conducting for years (such as installing pumps and flo%y lines, and managing seismic surveys), or for which ample technical assistance was available under the Bank loan or from foreign oil companies operating ir, Peru (such as inscalling centrifugal pumps in the jungle fields). Thenefore, the project did not present any technical complexity. The effectiveness of the Loan Agreement was delayed by only four months, while the overall delay in project implementation was 32 months (See PPAR, Key Project Data). As discussed later in thic memorandum (paras. 12- 16), the slow start of the project was due mainly to inadequate project preparation. It is true that the natural disasters of 1983 have contributed to further delays in the rehabilitation of northwest coastal wells. It must be pointed, however, that this project component was scheduled to be completed by July 1982, about six months before the onsei of natural calamities (SAR, para. 4.22). Therefore, the audit tends to discount the roles or project complexity and natural disasters and to put the major blame for implementation delays on the weaknesses in project preparation and implementation, including procurement. 10. The Aide Memoire of the last Bank supervision mission supports the audit's conclusions as to principal reasons for the long delays in project implementation: *It is important at this stage to also assess the major deficiencies observed during project implementation: (i) Procurement. The dplays in procurement have been caused by the interference of unsuccessful privae suppliers, government agencies (principally Contraloria)3/ and other 2/ Although a cost underrun on the order of 52 is reported in the PCR (para. 3.17), this figure should be taken with caution since (i) fewer abandoned wells (234 versus 300) were rehabilitated; and (ii) the actual amount of seismic surveys (1,527 line-km) was less than planned (2,100 line-km) (PCR, paras. 3.07-3.08 and 6.01). On the basis of estimated base costs (SAR, para. 4.28), the shortfall would correspond to approximately 112 of the estimated total project cost, suggesting an actual cost overrun of about 6Z for the project described in the SAR. 3/ The Office of Comptroller General. 4 comnissions named by PETROPERU's management... (ii) Resistance to the hiring of consultants. PETROPERU has in some occasions been reluctant to hire consultants on the premise that PETROPERU had the technical capability to undertake the studies on its own... (iii) Project Prepara- tion. The lengthy preparation of the Laguna Zapotal project has shown the need for the creation of project units fully dedicated and responsible for the preparation of a specific project. (iv) Project Implementation. The long delays in the implementation of the simple pozos ATA component4/ have been due to (a) insufficient project preparation; (b) delays in appointing a project manager with adequate autonomy; and (c) lack of logistical support of PETROPERU's northwest operations.* Project Preparation 11. Essentially the project consisted of three simple investment components, certain studies performed by consultants, and a major remedial program to address PETROPERU's institutional and financial difficulties. The preparation of the physical components did not present any difficulties, because they comprised routine oil field operations, advance action on them had already been taken by PETROPERU, and similar projects were being imple- mented in nearby fields by its foreign contractors which had access to quali- fiea engineering and adequate supplies. Nevertheless, in retrospect, the audit concludes that the design and preparation of the project could have been improved by a more rigorous preparation of the two production rehabilita- tion components, including procurement and implementation arrangements, and a more realistic assessment of implementation risks. 12. When the project was appraised during May 1979, the two production rehabilitation components were left at a conceptual stage, with only the number of wells and their geographical locations determined (SAR, paras. 4.09- 4.11). The Bank did not urge PETROPERU to run actual surveys needed to determine the work and material requirements and to prepare bidding documents for imported equipment during the ten months that elapsed between appraital and the Board date. As a result these project components suffered long delays (PCR, paras. 3.01-3.17). 13. The adverse effects of inadequate preparation is illustrated by the fact that, as late as May 1984 (about 22 months past the estimated completion date of thid component), the Bank was urging PETROPER' ,, provide an implemen- tation program for Phases II and III of the coastal well rehabilitation component comprising 216 of the 300 wells; and orders for pumping equipment were yet to be placed. The workover rig which was needed for lowering the pumps in some of the jungle fields was not delivered until early 1984 due to procurement difficulties. This experience illustrates the importance of 4/ The rehabilitation of abandoned or temporarily abandoned wells in the northwest coastal region. 5 rigorous project preparation regardless of the simplicity of individual project components (PPAM, para. 40). 14. Implementation Arrangements. Apparently in deference to PETROPERU's impressive past performance in implementing large and complicated projects, no specific measures were agreed to during project appraisal. However, it soon . became apparent to the Bank staff that special precautions were required to implement the project in a timely fashion. Consequently, agreement was reached vith PETROPERU to set up a Project Coordinating Unit in early 1980. . PETROPERU created a coordinating unit to oversee the implementation of the Bank project in February 1980; however, the unit was not given the required staff resources and authority to take a raal project coordinating role. This shortcoming persisted till the end of project implementation. 15. Project implementation units with adequate autonomy have been proposed as a solution to often intractable management problems of na.ional oil companies in several Bank projects (e.g., the Toot Oil and Gas Development Project in Pakistan (Credit 867-PAK), and the First and Second Bombay Offshore Development Projects in India (Loans 1473-IN and 1925-IN)). This arrangement was successful in the case of the two India projects. Whereas, in the case of the Pakistan project, the project implementation unit amounted to little more than an additional bureaucratic level doing mostly secretarial and liaison work.5/ The experience under these projects suggests a direct correlation between the effectiveness of an autonomous project implementation unit and the management's willingness to delegate authority and responsibility and to provide adequate staffing and operational facilities. 16. The consensus of opinion among the Bank staff interviewed is that, given the over-centralization of decision making in PETROPERU, the above requirements were very difficult to satisfy. The following example illus- trates this point. In December 1980, Mr. 0. Moreno was appointed as the Project Coordinator while he still retained responsibility as head of tae Operations Division in the Exploration/Production Department. While a cir- cular by PETROPERU's General Manager dated August 12, 1981 gave Mr. Moreno full auttority and zesponsibility as coordinator of the Bank project, another circular signed by the same official dated September 9, 1981 limited Mr. Moreno's responsibility to the exploration and production areas only. 17. Risk Assessment. The appraisal concentrated mostly on risks as- soci&ted with the behavior of petroleum reservoirs, PETROPERU's lack of experienced staff, and operational hazards. Risks deriving from the con- straints imposed on Peruvian public enterprises, such as unwieldy procurement regulations and lack of operational autonomy, which have adversely affected 5/ For details of the project implementation unit experience under these projects, see (i) PCR- India: First Bombay High Offshore Development Project, Report No. 4139, paras. 6.08-6.09; (ii) PCR- India: Second Bombay High Offshore Development Project, Report No. 6237, paras. 6.U6- 6.07; and (iii) PCR- Pakistan: Toot Oil and Gas Development Project, Report No. 6208, para. 3.01. 6 implementation, were not mentioned at all.6/ With the benefit of hindsight, the audit maintains that a better assessment of these risks would have possib- ly resulted in a more realistic implementation schedule and more effective project implementation arrangements. Performance of the Bank 18. The Bank staff did their best to er.sure the success of the project, and have established very good working relationships with both the Borrower and the Government (PCR, paras. 4.04-4.05). Bank supervision of the project was adequate and effective in bringing to the attention of the highest levels both in PETROPERU and the Government the shortcomings of project implementa- tion and possible solutions. Tne Bank staff cleared much of the bidding documents, bid evaluations and terms of reference in the field to speed up project implementation. However, the staff's efforts were often frustrated by Peru's inefficient and complex public enterprise management system. Performance of the Borrower 19. Weaknesses exhibited by the Borrower in project implementation in the areas of planning, coordination and procurement have already been men- tioned (PPAM, paras. 10 and 12-16). Apparently many of these derived from PETROPERU's unwieldy organization, shortage of technical staff, frequent staff changes and, later, disruptions caused by its reorganization (PPAM, para. 23). Certain difficulties, such as procurement delays, were probably unavoidable under the laws governing procurement by Peruvian public enter- prises (PCR, para. 3.23). However, PETROPERU also exhibited some self in- flicted weaknesses, such as refusal to hire consultants and contractors (PPAM, para. 10). 20. On the basis of interviews with the Bank staff connected with the project, the audit tends to attribute the less-than-optimal performance of PETROPERU on the project to its lack of an experienced middle level manage- ment. At the time of appraisal this weakness was well recognized; however, it was hoped that increasing salaries of PETROPERU staff to competitive levels would remedy it (SAR, para. 3.09). This hope failed to materialize for reasons outside PETROPERU's control (PPAM, para. 24). III. PROJECT OUTCOME Achievement of Project Objectives 21. Petroleum Production Increases. The jungle production has been increased from 21,800 BOPD in 1980 to 42,500 BOPD in 1985, mainly as a result of installation of pumping equipment, reservoir engineering studies, and 6/ For the constraints facing Peruvian public enterprises in project im- plementation, see Peru: Long-Term Development Issues, ADril 13, 1979, IBRD Report No. 2204-PE, Volume II, paras. 210-214. 7 deployment of workover and pulling units. Although only 234 wells were reactivated against 300 wells forecast, the rehabilitation of northwest coastal wells has resulted in an increased oil production of about 580,000 Bbls during the first five years of operation (PCR, paras. 3.02, 3.04, and 6.02(a)). 22. Enhanced Oil Recovery and Exploration. The loan has enabled the preparation of the Laguna Zapotal project which is now the only project ready to increase production in the short term (PCR, para. 3.06 and 6.02).7/ The seismic surveys in the jungle have delineated several drillable structures; however the drilling efforts undertakcn on some of these structures have not proven substantial additional reserves (PCR, paras. 3.07-3.08). 23. Institutional Objectives. Training and institutional studies have contributed to the strengthening of PETROPERU's technical, organizational and financial management capacity. The project, through hiring of foreign consul- tants, has enabled the transfer to PETROPERU of advanced technology (e.g. reservoir engineering models). Organization studies have resulted in the implementation of a more rational organizational structure for PETROPERU (PCR, para. 3.10). However, the constrained political environment within which PETROPERU is operating not only inhibits dacision making and management of long-term corporate strategy, but results in major operational decisions' being taken outside the company (?CR, para. 6.04(b)). Consultants' studies have defined the measures required to improve PETROPERU's financial, account- ing and management information systems. Some of these measures have already been implemented (e.g. inflation accounting, budgeting procedures, etc); however a major portion of the recommendations are yet to be implemented. The investment planning study has contributed to a strengthening of planning procedures of PETROPERU and the elaboration of a long-term investment plan (PCR, para. 6.02(c)). 24. Under a loan covenant, PETROPERU undertook to ensure competitiveness of its staff salaries and benefits with those offered by private petroleum companies operating in Peru (Loan Agreement. Section 4.01(b)). The Borrower complied with this covenant until the new Government which came to power in 1985 established a cap of about US$ 1,000 on monthly salaries of employees of state enterprises (Peru: Country Economic Memorandum, IBRD Report No. 5806-PE, December 17, 1985, para. 34). Despite higher salaries, PETROPERU's shortage of qualified technical personnel, particularly in the Exploration/ Production Department and in the fields has continued. Due to the lack of sufficient middle-level technical and managerial personnel, organization remained overly centralized in Lima, while operations in the field lacked a coordinating entity. 25. The Bank staff connected with the project attribute PETROPERU's lack of success in strengthening its technical cadres to two factors: (i) From mid- to late-1970s Peruvian universities graduated very few students in petroleum technology; and (ii) Peruvian technicians working abroad were not generally 7/ The implementation of the Laguna Zapotal project is being assisted by the Bank Loan 2195-PE. 8 eager to return to their native country because, first, foreign remuneration has always remained better than what PETROPERU could offer; and, second, the deteriorating country economic conditions constituted a real disincentive to repatriation. The experience under the project shows that, even when complied with, covenants requiring the improvement of personnel remuneration are not the panacea to staffing problems of public enterprises. Thus the need emerges to re-assess the Bank's approach to resolving staffing problems of developing country public enterprises. 26. Financial Objectives. The Loan Agreement (Section 5.05) included covenants for progressively reaching minimum targets for PETROPERU's debt service coverage ratio, quick ratio, and debt-to-equity ratio to ensure its financial viability. Despite progressively improving financial ratios during early years of project implementation, PETROPERU failed to reach covenanted targets for reasons beyond its control (PCR, paras. 5.01-5.06, and Annex 6). 27. The financial difficulties of PETROPERU were the end result of the Gove-nment's domestic petroleum product pricing and petroleum taxation poli- cies (SAR, paras. 2.31 and 2.34-2.36). Accordingly, the Guarantee Agreement provided for the gradual elimination of subsidies on domestic sales of petro- leum products, the assumption by the Government of part of PE'ROPERU's debt, and increased equity injections to PETROPERU (PCR, paras. 5.02-5.03). The Government had issued a ne., Decree Law prior to loan negotiations, correcting the most obvious adverse effects of the previous tax regime on PETROPERU's finances (PCR, para. 5.01). 28. The Government has initially complied with these covenants, result- irg in a temporary improvement in PETROPERU's financial situation. However, as Peru's structural adjustment faltered, the Government has found it increasingly difficult to give high priority to measures designed to improve PETROPERU's financial situation. As a result, petroleum product price increases have not fully compensated for domestic inflation, and total transfers to the 3overnment of petroleum revenues increased at the axpense of PETROPERU. This deterioration of revenue, compounded with the decline of Peruvian oil production, the fall of international petroleum prices after 1985, and the increase of PETROPERU's operating expenses due mainly to high domestic inflation, resulted in its financial situation becoming worse than it was at the beginning of the project. The following table shows the evolution of PETROPERU's year-end financial ratios: 1980 /a 1983 /a 1987/b Debt Service Coverage 1.40 1.34 -7.30 Quick Ratio 0.57 0.40 0,37 Debt-to-Equity Ratio 72:28 77:23 93:7 /a Source: PCR, Annex 6. /b Source: Supervision Report for Loan 2195-PE, August 11, 1988, Annex II, Table VII. 9 29. Since its founding in 1969 to take over the nationalized properties of the foreign-owned International Petroleum Company (IPC), PETROPERU had been the Governmeat's policy instrument in the petroleum subsector (SAR, paras. 3.01-3.06). Over time, PETROPERU was assigned a dual role in Peru's petroleum subsector: (i) the traditional role of an integrated oil company which in- cludes exploration, development, refining, and distribution activities, and (ii) the rcle of a public institution with overall responsibility for the development of the petroleum resources of the country and the implementation of the Government's petroleum policy. In this latter capacity, PETROPERU is the vehicle through which domestic petroleum prices are subsidized. The second part of PETROPERU's role is heavily dependent upon the Government's fiscal and pricing policies so that PETROPERU's financial autonomy is rather limited (SAR, Petroleum Production Enhancement Project, Loan 2195-PE, para. 5.01). 30. The covenants designed to improve PFTROPERU's financial situation, such as eliminating subsidies on domestic sale of petroleum products, reform- ing the petroleum taxation regime to mitigate its adverse effects on PETRO- PERU's finances, and the continuous transfer of budgetary resources by way of equity injection or debt assumption were bound to have profound effects on the Government's overall economic policy. To achieve their purpose they also required continuing Government commitment. Initially, the Government was taking steps to rationalize public sector enterprises through gradual deregu- lation, increased reliance on market mechanisms and promotion of private investment. However, when confronted with the 1981-1983 world recession and a high and rising rate of domestic inflation, the Government had to slow down, and in some cases to reverse, the implementation of its intended policy reforms (Peru: Country Economic Memorandum, December 17, 1985, paras. 1.13- 1.15 and 1.23). In the deteriorating economic environmen*, the goal of improving PETROF-"RU's financial situation at the expense uf increasing infla- tion became politically untenable, and was abandoned by the Government (PCR, para. 5.03-5.04). 31. In this respect, the project experience confirms one more time the conclusion of past audits that the problems of public enterprises are better addressed in the context of sector adjustment loans (Annual Review of Project Performance Results for 1987, August 17, 1988, Report No. 7404, para. 7.18). Given the difficulty of designing and implementing sector policy adjustment in the midst of economic crisis, it appears in retrospect that the best way to go about would have been a reorganization of Peru's petroleum sector so that PETROPERU would have been relieved from responsibilities other than those normally pertaining to commercial oil companies, 4.e. explor ition, production, transportation, refining and industrial activities. Uluer this concept, PETROPERU would have been treated on the same basis as its contrac- tors for exploration and production, and as a service company for its refinery operations. Thus PETROPERU would have been relieved by the Government of the financial and heavy administrative burdens, and the attendant political pressures, it had to bear directly on behalf of the state. As suggested in the SAR for the Petroleum Production Enhancement Project (Loa.I 2195-PE) (para. 3.07), the adoption of such a system, which would leave the Government, instead of PETROPERU, with the role of clearinghouse for taxes and subsidies, had a better chance of putting PETROPERU rapidly on a sound financial base. 10 32. Policy Objectives. The policy objectives of the project were to help the Government elaborate the required blend of policies and incentives to fully develop Peru's hydrocarbon potential, including defining the role of PETROPERU in the sector IPPAM, para. 7). This was to be achieved through two studies dealing with petroleum product pricing and sector development. 33. The pricing study was completed in November 1983 and its recommendations were discussed with the Bank. The Government followed the implementation of the study's recommendations until 1984. Thereafter short- term urgencies increasingly prevailed over long-term considerations, and the principles of the study were sacrificed to the politically expedient cause of controlling spiraling domestic inflation (PPAM, para. 31). 34. The sector development study was stunted. The terms of reference for this study were discussed with PETROPERU and the Government in January 1981. It was agreed that the sector development study should focus on the alternative organizational and institutional approaches to the future evolu- tion of PETROPERU within the context of its role in the development of the petroleum sector. Although the initial scope of the study included an evaluation of the role PETROPERU should play in the petroleum sector in the long term, the scope was reformulated in March 1982 to study only the investment program and priorities of PETROPERU, since the new Government had already decided on PETROPERU's role. The study, which had thus been reduced to a simple analysis of PETROPERU's investment requirements and their priorities, was completed in November 1984. The Bank staff attribute the Government's attitude regarding the role of PETROPERU to the political sensitivity of the subject. F 35. There is no evidence that the study has contributed appreciably to furthering the project's policy objectives. PETROPERU maintained its irrecon- cilable dual character, namely both as an integrated oil company and as en instrument of the Government for administering its petroleum policy. Govern- ment policies regarding foreign oil companies continued their historic vacil- lations, with two renegotiations of existing contracts and one nationalization within a period of about five years.8/ As a result, foreign company interest and involvement in Peru remained low. In the meantime, Peru's proven reserves of petroleum fell from 8?5 million Bbls at the end of 1981 to 457 million Bbls at the close of 1987, and petroleum production declined from a high of 195,000 BOPD in 1982 to 164,000 BOPD in 1987. Tne audit, therefore, concludes that the project's policy objectives were not achieved. Economic Performance 36. Despite implementation delays and declining petroleum prices, the economic rate of return (ERR) of the two revenue earning components of the project (installation of artificial lift in jungle fields and the rehabilita- 8/ Existing contracts with international oil companies were renegotiated in 1980, and rescinded in 1985. Although one international oil company was able to continue its production operations in Peru, the producing assets of another was nationalized and turned over to an affiliate of PETROPERU. 11 tion of abandoned wells in the coastal region) was above 100Z, as forecast at appraisal (PCR, para. 5.07) This is explained by the incremental nature of these investments. Both sub-projects benefited from the excess capacity in the existing infrastructure, and produced imnediate revenues which amortized investments within a very short period. 37. PETROPERU's northwest coastal area and Amazon region operations are ongoing production activities in mature areas. .ew wells are still being drilled as the need arises, and production is being shifted between 'ells depending on reservoir engineering considerations and equipment availability. Some of the equipment originally installed on reactivated coastal wells are being transferred to more productive new wells in the region. The two well servicing units purchased under the project are being used to maintain produc- tion also from non-project wells. The situation is further complicated by the fact that PETROPERU has never fully abandoned its old wells in the northwest coastal area, and has followed the practice of producing them intermittently with portable pumping and swabbing unizs --a practice likely to continue in the future. Regardless of the actual production costs for individual wells, operating expenses for a given area are being averaged. In the absence of an unnecessarily involved cash flow analysis going down to the level of indivi- dual wells, the allocation of incremental costs and benefits is at best arbitrary. Therefore, the audit consider- the ERRS given in para. 36 above only indicative. IV. ?INDINGS AND ISSUES Overall Assessment 38. Despite implementation delays and a very difficult project environ- rent, the objectives of the project were achieved to a significant degree. PETROPERU has reached its production targets on schedule (PPAM, para. 21). The project's institutional objectives were achieved, with the exception of financial targets and strengthening of PETROPERU's technical cadres (PPAM, paras 23-28). However, the policy objectives of the project remained elusive (PPAM, paras. 32-35). Despite these shortcomings, the project has enabled the Bank to en,dge in a broad based dialogue with the Government on the adjustment of its petroleum subsector, and produced two important studies on petroleum products pricing and petroleum sector investment requirements and priorities. These are likely to be beneficial in the long term. Therefore, the audit considers the project successful. Sustainability 39. The principal economic benefits of the project are derived from the increase in PETROPERU's oil production. Therefore, the sustainability of project benefits depends essentially on PETROPERU's ability to maintain the increased production levels and future petroleum prices. During the last few years PETROPERU has demonstrated that it has the operating know-how to keep oil production from its fields at acceptable levels (PCR, Annex 1). The Bank staff estimate PETROPERU's average production cost at about US$ 6 per barrel. 12 This ensures a comfortable margin even at today's depressed oil prices (US$ 18 per barrel). Therefore, barring a major collapse of international petroleum prices, the economic benefits derived from the project should be sustainable. Lessons of Experience 40. Despite PETROPERU's considerable petroleum industry experience and the availability of assistance from the Baak and international oil companies operating in Peru, the project suffered long implementation delays. The audit concludes that these long delays were caused mainly by lack of rigor in project preparation (PPAM, para. 9). This experience strengthens the often repeated lesson that, Regardless of the simplicity of a project and the sophis- tication of the project entity, the Bank should insist on a rigorous project preparation comprising all aspects of implementation, ani, to the extent possible, monitorable time schedules sbould be prepared for all critical ac- tivities, such as engineering and procurement. 41. Initially the Bank did not seek special implementation arrangements for the project. Later, when it became apparent that such an arrangement was necessary for successful implementation, it sought to establish an autonomous project entity within PETROPERU. Although this latter went along with the Bank's recommendation, the scheme failed to achieve its goal due mainly to difficulties deriving from PETROPERU's reluctance to delegate authority and to allocate resources to the project entity (PPAM, para. 14). The following lesson emerges from this experience: In designing project implementatioi arrangements, the project entity's corporate culture and the project en- vironment should be carefully evaluated in order to e.,sure their workability . 42. Finally, the fate of the Petroleum Sector Development Study which failed to achieve one of its main goals, whicb was to determine the optimum role to be played by PETROPERU in t- country's petroleum sector (PPAM, para. 34), suggests the following lesson: The Bank should seek a formal agreement with the borrower on the terms of reference of critical studies which may involve political sensitivities as early as poesible in the project cycle, preferably before committing itself to a project. 13 ATTACHMENT Page 1 of 14 COIMENTS FROM THE BORROWER (TRANSLATION) PETROLEOS DEL PERU PSEP PE-067-89 *San Isidro, June 8, 1989 Mr. Alexander Nowicki Division Chief OED World Bank 1818 H Street, NW Washington, D.C. 20433 Dear Sir: Ref: Project Performance Audit Report Petroleum Production Rehabilitation Project (Loan 1806-PE) With reference to your communication of May 16, 1989, please find attached our comments on the above-mentioned report.* We would refer to our telex no. 3776 of May 18, 1989 and confirm that we have made investigations relative to your communication of March 21, 1989, which was not received by the management of FETROPERU S.A. Yours, etc. Jaime Venero Colunge Managing Director *TN: See footnote, next page. 14 ATTACHMENT Page 2 of 14 Conments and Observations on the Project Completion Repnrt on the Petroleum Production Rehabilitation Project (Loan 18U6-PE) PAGE ii: "BASIC DATA SHEET" The Bank has condensed different data from those recorded by Petroleos del Peru S.A. (US$million): Loan 1806-PE Original Outstanding Amount Disbursed Cancelled Reimbursed at May 1988 IBRD 32.5 30.2 2.3 9.1 21.1 PETROPERI: 32.5 30.5 2.0 9.4 21.1 CUMULATIVE DISBURSEMENTS Financial Year 1981 1982 1983 1984 1985 a. estimate 4.0 28.5 32.5 32.5 32.5 b. actual - IBRD - 9.5 21.0 26.2 30.5 - PETROPERU 2.9 17.3 25.3 29.4 30.5 c. (b) as % of (a) - IBRD - 33.3 64.6 80.6 94.5 - PETROPEPU 72.5 60.7 77.8 90.5 93.9 Page iv: "KEY ASPECTS - ITEM No. 4"* It is a mistake to say that Peru's oil production increased from 21,800 b/d in 1980 to 42,500 b/d 'n 1985. This statement should read.... "Northern jungle production rose from 21,800 b/d in 1980 to 42,500 b/d in 1985." Peru's total production was 195,000 b/d in 1980 and 188,500 b/d in 1985. "Rehabilitation of wells increased production from 100 b/d to more than 600 b/d. Regarding the ATA wells, Suab began production in September 1982. The first stage was completed in October 1984 (installation of 84 mechanical pumps - MP). The second stage (installation of 120 MP) ended in June 1986; subsequently 120 wells had to be reactivated by Suab. *TN: Reference not found in English-language version of reports. Note that, as the above title states, the borrower's comments do not in fact refer to the PPAR but to the PCR. 15 ATTACDNNT Page 3 of 14 CUMULATIVE PRODUCiInN FROM ATA WFLLS, BY YEAR SUAB MP TOTAL B/D 1982 6,460 430 6,890 56 1983 6,186 27,090 33,276 91 1984 17,401 121,145 138,546 379 1985 57,452 156,394 213,846 585 Page 3, para. 1.06: "ECONOMIC STABILIZATION PROGRAM" The statement that during the first semester of 1987, GDP grew by only 0.2% compared with the second sentester of 1986 is correct; however, we think that it is important to mention that during 1987 Peru's economy grew significantly (6.9% increase in GDP) as a result of internal demand, although this impetus did lead to the appearance of certain macroeconomic imbalances. Page 7, para. 2.08(a): "PETROPERU's FINANCIAL SITUATION" It is stated that agreement on a debt/equity ratio of 52/48 for 1983 was reflected in the Loan Agreement; however, the Agreement (Section 5.07(a)) contains a ratio of 60/40.* This figui is included correctly in page 32, "Financial Ratios: Actual vs. Recommended." Page 10, para. 2.12: "REACTIVATION OF 300 WELLS IN PETROPERU's COASTAL OPERATIONS" We agree that 300 wells were rehabilitated; however, the productici data referred to do not agree with our statistics. Page 10, para. 2.13: "FEASIBILITY STUDY FOR A SECONDARf RECOVERY PROJECT" Currently the Talara Secondary Recovery Project is undertaking this work. Page 15, para. 3.13: "STUDY TO HELP PETROPERU IN THE DEVELOPMENT OF ALTERNATIVE INVESTMENT PLANS FOR 1983-87 AND THE LONG TERM (1988-2000)" Reference is made to the study conducted under this project to help PETROPERU formulate investment plans. In practice, Arthur D. Little International submitted in November 1984 a report entitled "Study of *TN Apparent meaning; not entirely clear ftom Spanish text. 16 ATTACHMENT Page 4 of 14 Investment Analysis and Planning"; as mentioned, this study investigated in dtpth issues related to exploration and production, such as: the level of hydrocarbon resources in Peru, economic analysis of the exploration and development of these resources, the outlook for reserves and production, review of major investment projects, and priorities and planning for investments and production. Many of these policy recommendations and investment plans were applied according to circumstances, particularly as regards promotion outside Peru for the purpose of attracting new contractors; jungle operations maintenance programs; design of secondary recovery projects; and others. The study also considered the advisability of postponing the execution of -efining projects in the short and medium term, investing to meet capacity needs rather than anticipating them, and emphasizing relatively low-cost, low-risk investments offering rapid recovery and higher economic returns. On this basis some high-investment projects had to be postponed. The same study provided criteria for project appraisal and planning of investments, some of which were incorporated in the company's Manual of Standards for Project Preparation. Page 15, para. 3.14: "STUDY TO DETERMINE THE MOST APPROPRIATE PRICING STRUCTURE FOR THE COUNTRY AND THE NATIONAL OIL COMPANY" This paragraph is a reference to the study submitted by Arthur D. Little in November 1983 entitled: "Petroleum Product Pricing and Taxation Study," in several volumes. The purpose of the study was to recommend price policies and strategies for PETROPERU. It was recommended that a new system of prices should be introduced based on their international equity, so that the company would earn the income required to cover its operating costs. This objective has not yet been achieved, despite the various price structures submitted to government bodies for their approval, since it is the Ministry of the Economy and Finance that determines the structure of controlled prices; however, PETROPERU's Rehabilitation Plan (April 1989) provides for the prices of controlled products to be related to international prices. As a working document, the study, although it did refer to the historical background and included long-term projections, was somewhat unrealistic in light of the level of international prices prevailing at that time, while it did not include a basic analysis of costs. In genecal it was a useful reference document. 17 ATTACHMENT Page 5 of 14 Page 17, para. 3.17: "PROJECT COST AND FINANCING" The total cost of the project is referred as being US$50.7 million. However, PETROPERU's audited statements fur 9831985 refer to a figure of US$46.8 million, and the audited statement for 1986 to a figure of US$58.7 million as the revised figure for a total cost of executing the project. We note that the amount disbursed under IBRD Loan 1806-PE, namely US$30.5 million, which is part of the total cost of the project, is the same both ir. our records and in IBRD'S disbursement statements. Page 17, para. 3.20: "DISBURSEMENTS AND ALLOCATION OF BANK PROCEEDS" In line with our observation on Page ii, "Basic Data Sheet," the percentages determined by IBRD in item (c) should be adjusted in light of the figures indicated by PETROPERU S.A. Page 19, para. 4.01: "INSTITUTIONAL PERFORMANCE - BACKGROUND" The report should be corrected as follows: PETROPERU was created from the Empresa Petrolera Fiscal, takirg over the assets of the International Petroleum Company and a number of privately-owned companies. Page 24, para. 6.02(a): "CONCLUSIONS" Regarding the results from the ATA wells, total production in December 1985 was 392,588 bb1s/day; in October 1986 this figure reached 580,289 barrels, which coincides with the statement in this paragraph. Page 32: "FINANCIAL RATIOS: ACTUAL VS. RECOMMENDED" The IBRD report indicates that the recommended current assets/current lial lities ratio for 1985 should be 2.0; the figure is 1.0, as provided for in Loan Agreement 1806-PE. Likewise the recommended debt/equity ratio for 1980 is shown as 75/25, although the Loan Agreement contained no recommendation for that year. For 1982 and 1985 the actual debt/equity ratios are shown in the report as 81/29 and 80/23, respectively; the correct figures are 81/19 and 80/20. 18 ATTADENT 541 PETROLEOS DEL PERU Page 6 of 14 PSEP-PE-067-89 San Isidro, 08 de Junio de 1989 Señor Alexander Nowicki Jefe División de Préstamos para Ajustes de Políticas Económicas y Sectoriales, Industria, Servicios Públicos y Sector Urbano Departamento de Evaluación de Proyectos 1818 H. Street N.W. Washington D.C. 20433 U. S. A. De mi consideración: Ref.: Proyecto de Rehabilitación de Producción de Petróleo Préstamo 1806-PE Informe de Evaluación Ex-Post del Proyecto En atención a su comunicación de fecha 16 de Mayo de 1989, adjunto sir- vase encontrar los comentarios referidos al Proyecto de Rehabilitación de la Producción de Petróleo - Préstamo 1806-PE - Informe de Evaluación Ex-Post del Proyecto. Hacemos referencia a nuestro Télex NQ 3776 de fecha 18.05.89, para rei terar a Uds. que hemos realizado las indagaciones correspondientes a su comunicación del 21 de Marzo de 1989, la cual no ha sido recibida por la Administración de PETROPERU S.A. Sin otro particular, quedamos de Uds. muy atentamente, PETROPERU S A. ME xC LA R ~a "3i, PART a . mi. LAR.u TELEX *~33 - »ssal TELEMNO m*0 M~415033 19 ATTACH~ Page 7 of 14 COMENTARIOS Y OBSERVACIONES AL INFORME DE TERMINACION DEL PROYECTO REHABILITACION DE LA PRODUCCION DE PETROLEO (PRESTAMO BIRF 1806-PE) PAGINA ii "HOJA DE DATOS BASICOS" El BIRF condensa datos diferentes a los que se tienen reqistrados en Petroleos de Perú S.A. (MMUS$). A MAYO 1988 PENDIENTE DE ORIG. DESEM. CANCE. REEMB. REEMB PRESTAMO 1806-PE BIRF 32.5 30.2 2.3 9.1 21.1 PETROPERU 32.5 30.5 2.0 9.4 21.1 DESEMBOLSOS ACUMULADOS DEL PRESTAMO Ejercicio Económico 1981 1982 1983 1984 1985 a. Cifra estimada 4.0 28.5 32.5 32.5 32.5 b. Cifra efectiva - BIRF - 9.5 21.0 26.2 30.5 - PETROPERU 2.9 17.3 25.3 29.4 30.5 c. b) como Porcentaje de a) - BIRF - 33.3 64.6 80.6 94.5 - PETROPERU1 72.5 60.7 77.8 90.5 93.9 20 ATTACENT Page 8 of 14 PAGINA iv "ASPECTOS SOBRESALIENTES - PUNTO No.4" Cuando se indica que el objetivo loqrado en producción petrolera del Perú que aumentó de 21.800 b/d en 1980 a 42,500 b/d en 1985, se incurre en un error, deberá indicarse diciendos..."La producción petrolera del Perú en Selva Norte ha aumentado de 21,800 barriles diarios (b/d) en 1980 a 42.500 b/d en 1985." A nivel país la producción fue de 195 MB/DC en 1980 y 188.5 MB/DC en 1985. .."La rehabilitación de pozos ha acrecentado la producción de 100 B/D a más de 600 B/D". Con respecto a los pozos ATA, la producción se inició por Suab en Setiembre 1982. La primera etapa se terminó en Octubre 84 (instalación de 84 Unidades de bombeo mecánico-UBME). La sequnda etapa (inst. de 120 UBME) se terminó en Junio 86 y posteriormente a esta fecha se debieron reactivar 120 pozos por Suab. PROD. ACUMULADA DE POZOS ATA POR A¡O UAB UB<ME TOTAL B/D 1982 6,460 43o 6,890 56 1983 6.186 27,090 33.,276 91 1984 17,401 121,145 138,546 379 1985 57,452 156,394 213,846 585 PAGINA 3 "PROGRAMA DE ESTABILIZACION ECONOMICA" - ACAPITE 1.06 En lo que se refiere a antecedentes económicos, la información indicada rs correcta cuando se menciona que en el primer semestre de 1987 el PBI creció sólo el 0.2% comparado con el sequndo semestre de 1986: sin embarto consideramos que es importante mencionar que durante el ano 1987 la economía peruana continuó con un notable crecimiento product.ivo del 6.9% (PDI) bajo el impulso de la demanda interna, aún cuando este dinamismo tuvo su contrapartida en la aparición de ciertos desequilibrios macroeconómicos. 21 ATTACIENT Page 9 of 14 PASINA 7 ACAPITE 2.08 a) "SITUACION FINANCIERA DE PETROPERU" Se menciona que la relación deuda/capital para 1983 deberá ser de acuerdo al Convenio de Préstamo (Sección 5.07a) 52/48. sin embarqo en el convenio se señala 60/40. Esta última relación se menciona correctamente en la PAQina 32 "Relaciones Financieras# Efectivas (e), Recomendadas (R). PASINA 10 ACAPITE 2.12 "REACTIVACION DE 300 POZOS EN LAS OPERACIONES COSTANERAS DE PETROPERU" Coincidimos en que se rehabilitaron 300 pozos, no obstante, los datos de producción indicados no concuerdan con nuestras estadísticas. PAGINA 10 ACAPITE 2.13 "ESTUDIO DE VIABILIDAD PARA UN PROYECTO DE RECUPERACION SECUNDARIA" Actualmente la Unidad Proyecto Rec.peración Secundaria Talara se encar(Qa de estos trabajos. PAGINA 15 ACAPITE 3.13 "ESTUDIO PARA AYUDAR A PETROPERU EN LA FORMULACION DE PLANES DE INVERSION ALTERNATIVOS PARA 1983-1987 Y A LARGO PLAZO (1988-2000)" Se menciona el estudio que se orininó bajo este provecto para aVudar a PETROPERU en la formulación de planes de inversión. En efecto, la firma Arthur D. Little International presentó en noviembre 1984 el documento "Estudio de Análisis y Planeamiento de Inversiones", y tal como se indica, este estudio profundizó Los aspectos de Pxplotación - producción. tales como: base de los recursos de hidrocarburos en el Perú; análisis económico de la cxploración de recursos y desarrollo:. perspectivas para reservas y producción revisión de los mayores proyectos de i nversi ón; pr i ur i dad v plan de inversiones en exp 1 oraci ón-producc i ón. Al respecto, muchas de las recomendaciones de politicas y planes de inversión se fueron aplicando de acuerdo a las circunstancias, especialmente en lo que se refería a promoción fuera del país con el propósito de atraer a contratistas nuevos, proqramas de mantenimiento en la selva, diseZo de provectos de recuperación secUndaria, y otros. En adición, el estudio consideraba la conveniencia de diferir la ejecución de prc:vectos, de refinación en el corto y mediano plazo, e invertir en respuesta a la n,cesidad de capacidad más bien que en anti ci paci ón a la necesidad. y dar én+asis a inversiones de costo relativamente bajo, de poco riesqo, recuperación rápida y con retornos económicos superiores. En esta materia efectivamente alqunos proyectos de alta inversión tuvieron que ser diferidos. 22 ATTACENT Page 10 of 14 El mismo estudio daba pautas de procedimientos para la evaluación de proyectos y planificación de inversiones, alQunos de los cuales fueron tomados en cuenta en el Manual de Normas para Elaborar Proyectos de la Empresa. PASINA 15 ACAPITE 3.14 "ESTUDIO PARA DETERMINAR LA ESTRUCTURA DE FIJACION DE PRECIOS MAS ADECUADA PARA EL PAIS Y LA COMPAAIA PETROLERA NACIONAL" El informe del Banco Mundial se refiere al estudio que presentó Arthur D. Little en noviembre 1983 en documento titulado "Petroleum Product Pricinn and Taxation Study", en varios tomos. El objetivo del estudio fue recomendar estrateqias de políticas de precios para PETROPERU. El planteamiento consistía en iniciar- un nuevo sistema de precios con referencia al paridad internacional, a fin de que la empresa alcance los inqresos que cubran sus costos de operación. Este objetivo aún no se cumple a pesar de las diferentes estructuras de precios que se han venido presentando a los OrQanismos del Gobierno para su aprobación, ya que es el Ministerio de Economía y Finanzas quien determina las estructuras de los precios controlados, sin embarno el Plan de Saneamiento de PETROPERU (abril 1989) establece nue los precos de los productos controlados estén en relación con los precios internacionales. En cuanto al estudio mismo como documento de trabajo, si bien es cierto enfocó aspectos de perspectivas históricas y proyecciones a larqo plazo escapó un poco a la realidad por la coyuntura de precios internacionales existentes en ese momento y además porque no consideró un análisis de costos que sirviera de base. En qeneral fue un buen documento de referencia. PAGINA 17 ACAPITE 3.17 "COSTO Y FINANCIAMIENTO DEL PROYECTO" Se señala un costo total de proyecto estimado de US$ 50.7 millones, sin embarqo en los Estados Auditados de 1983/1985 de PETROPERU se establece US$ 46.8 millones y en el Estado Auditado 1986 se indica US$ 58.7 millones como cifra revisada para la ejecución total del proyecto. Debemos precisar nue el monto desembolsado del préstamo BIRF 1806-PE de US$ 30.5 millones, que forma parte del costa total del proyecto, es conforme tanto en nuestros reqistros como en los estados de desembolso del BIRF. 1e 23 ATTACHMENT Page 11 of 14 PASINA 17 ACAPITE 3.20 "DESEMBOLSO Y ASINACION DEL IMPORTE DEL PRESTAMO DEL BANCO" De acuerdo con lo señalado en el comentario de la Páqina ii "Hoja de Datos Básicos", los porcentajes determinados por el BIRF en el punto c), deberán ser correqidos con las cifras que señala PETROPERU S.A. PAINA 19 ACAPITE 4.01 "DESEMPEÑlO INSTITUCIONAL- ANTECEDENTES" Respecto a este punto debe correqirse la redacción en los siquientes términoss PETROPERU se formó a partir de la Empresa Petrolera Fiscal tomando posesión de los activos de la International Petroleum Co., así como de diversas compañías de propiedad privada. PAGINA 24 "CONCLUSIONES" - ACAPITE 6.01 SeQ¡ún informe final de nuestras operaciones en Noroeste (22.01.87) sólo faltaban 10 pozos a rehabilitar (por Suab) y no 66 como se indica en este punto. PAGINA 24 "CONCLUSIONES" - ACAPITE 6.02 a) En cuanto a resultados de pozos ATA, en Diciembre 85 se alcanzó una producción acumulada de 392,558 Bbl. Recién en Octubre 86 se alcanza la cifra de 580,289 Bbl. que es concidente con lo afirmado en este punto. PAGINA 32 "RELACIONES FINANCIERASs EFECTIVAS (E) Y RECOMENDADAS <R)" El. informe BIRF consiqna para el año 1985, como recomendación para la relación activo disponible/p¿isivo corriente: 2.0., siendo lo correcto 1.0, seqún lo establecido en el contrato de préstamo 1806-PE. El informe BIRF consiona para el año 1980, como recor para la relación deuda/capital: 75/25, a'n cuando el contrat- ,r-amo no establece recomendación alquna para ese año. Durante 1982 y 1985, la relación deuda/capital efectiva consiqnada en ;orme es de 81/29 y 80/23. respectivamente, siendo lo correcto 81,, v 80/20 para dichos años. 24 ATTACHMENT Page 12of 14 BANK REPLY TO COMMENTS FROM THE BORROWER Comment no. 1: "Basic Data Sheet is in error on amount disbursed and on the timing of disbursements". Bank's response: The PCR figure of $30.2 million for total IBRD disbursement is correct. The PETROPERU figure of $30.5 is in error. The differences in the timing of the disbursements is a result of che IBRD figures being based on a fiscal year and the PETROPERU figures on a calendar year. Comment no. 2: "(Re. Principal Aspects) It should be made clear that the production increase from 21,800 barrels daily (b/d) in 1980 to 42,500 b/d in 1985 occurred in the jungle." Bank's response: This is correctly reported in paragraph 6.02 (a) of the PCR. Comment no. 3: "(Re. parn. 1.06) The statement in paragraph 1.06 that "During the first semester of 1987, GDP grew by only 0.2Z compared with the second semester of 1986..." should be followed by an observation that "during 1987 as a whole the Peruvian economy grew by 6.9Z driven by a strong internal demand although this dinamism was offset by macroeconomics disecuilibrium." Bank's response: PETROPERU's comment has been noted but inasmuch as it refers to a period two years after the Closing Date of the project it was not considered necessary to include in the PCR. Comment 'o. 4: "(Re. para. 2.08A) The debt/equity ratio to be reached by 1983 should be 60/40 as shown in the Loan Agreement and not 52/48 shown in the PCR. Bank's response: PETROPERU's comment is justified and we hrve amended the PCR accordingly. Comment no. 5: (Re. para. 2.12) PETROPERU agrees that 300 wells were reactivated but disputes the production increase shown in the PCR without giving an alternative figure. Bank's response: We have deleted from the PCR the sentence which dealt with production from the 300 reactivated wells. 25 ATTACHMENT Page 13 of 14 Comment no. 6: *(Re. para. 2.13) PETROPERU states that the Secondary Recovery Project Unit is now supervising the secondary recovery operations in the Brea-Parinas area." Bank's response: No action is necessary. Comment no. 7: "(Re. para. 3.13) PETROPERU mentions the name of the consulting company which performed the study on the development of alternative investment plans, and states that many of the recommenlations contained in the study have been put into effect. Bank's response: PETROPERU's comments are noted but it is not considered necessary to change the PCR. Comment no. 8: "(Re. para. 3.17) PETROPERU refers to the Petroleum Product Pricing and Taxation Study and notes that since April 1989 petroleum product prices have been tied to international levels although the price recommendations made in the study were impractical at the time (Iqe3). Bank's response: PETROPERU's comments have been noted. No action necessary on the PCR. Comment no. 9: "(Re. para. 3.17) PETROPERU questions the figures given in the PCR for the total project costs and for the amount used from the original Bank loan". Bank's response: We believe the difference in the Bank's and PETROPERU's total cost figure has to do with the Bank using historical cost figures on the basis of average exchange rates and PETROPERU taking a different approach. The PCR shows wrong figures for the total disbursement of Bank funds (US$30.5 million instead of $30.2 million) and for the amount which was cancelled (US$2.0 million instead of US$2.3 million). The corresponding corrections have been made in the PCR. Comment no. 10: "(Re. para. 3.20) This comment repeats part of comment 1 in questioning the disbursement schedule". Bank's response: As pointed out in comment no. 1, the Bank has used a fiscal year schedule and PETROPERU have used the calendar year. 26 ATTACHMENT Page 14 of 14 Comment no. 11: "(Re. para. 4.01) This comment notes that PETROPERU evolved from Empresa Petrolera Fiscal (EPF) which had taken over the assets of International Petroleum Corporation as well as those of several other privately owned oil firms". Bank's response: In as much as the PCR version of the origin of PETROPERU only omits the EPF stage it is not considered necessary to alter paragraph 4.01. Comment no. 12: "(Re. para. 6.01) PETROPERU states that only 10 wells were pending rehabilitation at the end of the project and not 66 as stated in the PCR". Pank's response: The 66 well figure we have used is correct. It is the total of wells pending rehabilitation at the end of August 1985 which is the Closing Date of the Loan. PETROPERU's figure of 10 wells is as of January 1987. Comment no. 13: "(Re. para. 6.02(a)) PETROPERU questions the figure of 580,000 barrels of increased production pointing out that this is the total through October 1986. The total as of December 1985 was only 392,558 bbls". Bank's respon3e: PETROPERU is correct and we have amended the PCR accordingly. Comment no. 14: "(Re. Financial Ratios: Actual vs. Recommended) PETROPERU point out various differences between the figures shown in the PCR for quick ratio recommended for 1985, Debt/Equity recommended for 1980, and actual debt/equity ratios for the years 1982 and 1985. Bank's response: PETROPERU is correct in its observations and the corresponding corrections have been made on the PCR. JStoddart:mhc 27 PERU PROJECT COMPLETION REPORT eETROLEUM PRODUCTION REHABILITATION PROJECT (Loan .,)6-PE) Trade, Finance and Industry Division and Technical Department Latin America and Caribbean Region 28 PERU PETROLEUM PRODUCTION REHABILITATION PROJECT (LOAN 1806-PE) PROJECT COMPLETION REPORT I. INTRODUCTION Economic Background 1.01 Peru is among the seven Latin American and Caribbean countries that experienced actual declines in per capita income over the last decade. Weak overall economic growth translated into sluggish employment growth, coupled with rapid (2.5Z per annum) population growth, resulting in sharply declining per capita income during 1970-83. Although GDP grew by 4.82 in 1984, it remained nearly 72 below the 1982 level and 2.6Z below 1980. The declines in GDP have had highly adverse effects on average household real income, which dropped 24Z between 1980 and 1983, bringing it to 19% below even 1971-72 levels. Real per capita GDP in 1983 was no higher than in 1963; between 1970 and 1983, per capita GDP fell 10?. In 1966, Peruvians had attained a per capita income equal to 9Z of the US level and, by the same measure, ranked eleventh among the 20 largest Latin American and Caribbean countries.1 By 1983, Peruvian per capita GNP had fallen to only 7Z of the US level. 1.02 During the mid 1980s, Peru was confronted with the 1981-83 world recession bringing with it declines in metal prices and export volumes. Between 1980 and 1982, Peru's terms of trade ueclined by 16?. The government confronted with a high and rising rate of dimestic inflation: the consumer price index (CPI) rose from 61? in 1980 to 73Z in 1981. The government tried to reduce inflation by slowing the pace of the currency depreciation during 1981 and 1982. In mid-1982, the IMF approved an SDR 850 million compensatory-cum EFF financing to support Peru's stabilization and structural adjustment efforts. In 1983, a number of events produced a massive (11?) drop in real GDP. The country's still sizeable public sector and current account deficits, combined with the reduced avai.ability of new external loans from international commercial banks, forced the government to implement deflationary policies by late 1982. The new measures included a large cut in public investment, accelerated price increases for publicly supplied goods and services, and faster reduced of food subsidies. 1.03 The intensifying economic slowdown was severely compounded by major disasters during the first half of 1983. Heavy rains flooded the northern part of the country, a severe drought afflicted the south, massive landslides in the central area disrupted communications and the fish catch was sharply reduced. The cost of replacing the damaged infrastructure was estimated at over US$500 million, about 40Z of the 1983 public investment budget. Output losses were also substantial. Agricultural production was particularly hard hit in the north of Per', where cotton crops were destroyed. Flooding of the Talara oil fields and damage to the Trans-Andean pipeline caused a 12? drop in oil produc- 1/ Based on World Bank Atlases. 29 tion and a 102 fall in petroleum exports. In addition to these natural dis- asters, the economy suffered from a severe private sector credit squeeze precipitated by the need to finance a public deficit of about 112 of GDP, at a time when external interest rates were rising and access to 7xternal capital was becoming more difficult. Unemployment rose from 72 in 1982 to over 92 in 1983, and real per capita GDP fell by 13.32. Nonetheless, the financing of the balance of payment deficit required a renegotiation of commercial bank debt (in March 1983) and official bilateral debt (in July 1983). The rescheduling agree- ment with the commercial banks included the phased release of US$450.0 million in 'new money*, based upon continuing IMF support. However, public sector revenues declined substantially during the recession and the public sector deficit substantially exceeded the Government's target under the IMF arrangement. In 1984, the economy experienced a modest recovery, with GDP increasing about 4.82. Economic Stabilization Program 1.04 On July 28, 1985, a newly elected government headed by the President Alan Garcia, inherited an extremely difficult economic and social situation: - Peru's real per capita income was at the level of the early 1960s; - two-thirds of the population was either unemployed or under employed; - real wages were about half of the 1973 levels; - the inefficient public sector spent half the GDP; - annualized inflation based on the first seven morths of tbe year was 250?; - external debt was 752 of GDP with interest arrears of about US$750 million; - and, over half the money supply was in dollar-denominated deposits. In addition, external prospects looked bleak with low projected prices for minerals (which account for half of Peru's exports), declining prices and volumes for Peru's largest ex,ort, petroleum, and little hope of obtaining access to external capital markets for new money. President Alan Garcia reacted to the difficult economic situation announcing a limit to Peru's external pay- ments of 10? of its export income. 1.05 The government's announced stabilization program was primarily structured to control inflation and stimulate growth. It also emphasized improvements in the income of the poorest and agricultural development, especially in the poor southern Andean mountain region. In order to break inflationary trends the government initiated adjustments in utility tariffs and petroleum prices, froze prices ana wages, lowered effective interest rates in several stages as means to control cost and fix the exchange rate. It also made some cuts in public expenditure, including reducing the purchase of military equipment. These initial measures resulted in a major improvement in the budgetary position, mostly due to nonpayment of foreign public interest obliga- tions. However, when recessionary pressures from the stabilization program set in, the government took expansionary measures to stimulate the economy. 1.06 The reaction of economic activity to the new government policies in 1985 was sluggish. For a whole year, real growth was 1.9?. In 1986, GDP grew 30 at 8.52. On a sectoral basis, manufacturing and construction were the most dynamic sectors, growing at 182 and 21.5Z respectively. During the first semester of 1987, GDP grew by only 0.22 compared with the second semester of 1986 because of the slowdown in real aggregate demand as result of an accelera- tion in inflation and the cessation of real wage increases. On the other hand, the establishment of a formal budget for foreign exchange allocation in late 1986 caused delays in approval and delivery of imported inputs which also con- strained production. Total debt at the end of 1987 was about US$16.0 billion, of which about US$13.3 billion was public medium- and long-term debt. Short- term debt was US$2.7 billion. Inflation had accelerated from 57.3? between September 1985 and September 1986 to 93.5? the following year. The stock of arrears outstanding as of the end of 1987 is estimated at US$7.4 billion, or 45? of total foreign debt. This figure includes US$182.0 million due the World Bank and around US$430.0 for the IMF. Petroleum Sector 1.07 Petroleum is the dominant source of energy in Peru, supplying about 80? of the country's commercial energy requirements, and will supply the major part of Peru's energy requirement for the rest of the century. Peru's first oil wells were drilled in 1863, making it one of the oldest oil-producing countries in the Western Hemisphere, and the country rapidly became a net exporter of petroleum. However, during the late 1940s and 1950s, when gasoline and fuel oil prices were among the lowest commodity prices in the world, producers' profit margins were reduced and growth in domestic consumption outstripped that of production so that the country became a net importer in 1958. In 1968, follow- ing a military coup, the government nationalized the International Petroleum Company (IPC), the producer of 90? of Peru's crude output. While production from the traditional coastal and offshore fields in northern Peru rose slowly throughout the 1960s consumption continued to grow rapidly, and Peru became increasingly dependent on crude oil imports to meet its own domestic require- ments. 1.08 The initial exploration success of PETROPERU and Occidental was follow- ed by a number of unsuccessful exploratory wells drilled by other contractors. In late 1979, the Peruvian Government updated its petroleum law and arranged for U.S. oil companies to pay income taxes directly to the Peruvian Treasury rather than through PETROPERU, thus making the U.S. firms eligible for U.S. tax credits. These actions permitted renegotiation of some of the existing contracts with foreign oil companies, but were apparently not conducive to attracting new investment by additional companies. After the presidential elec- t4on held in May 1980, the new government adopted a liberalized petroleum law which again encouraged a considerable amount of interest in oil exploration. As a result, several foreign oil companies signed production-sharing contracts with PETROPERU, both offshore and in the Amazon region, and a number of additional firms are investigating exploration opportunities in Peru. 1.09 As a consequence, the Government's strategy since 1980 has been aimed at increasing petroleum production through accelerated exploration and develop- ment, while attempting to restrain domestic demand and encourage efficient use of petroleum products, mainly through pricing policy. The government has recog- nized that petroleum exploration and development, particularly in the Amazon basin, require more resources and technical expertise and management skills than it can provide. Partly for this reason the government has adopted legislative and policy measures designed to attract foreign oil companies. Several have 31 already committed substantial amounts of risk capital for petroleum exploration in the country. II. PROJECT PREPARATION AND APPRAISAL REPORT Preparation 2.01 Peru is comprised of three major geologic provinces, each containing several sedimentary basins with varying hydrocarbon potential: (a) the offshore coastal region, regional and the offshore, particularly the Northwest portion of the country, where almost all of Peru's early oil production was centered; (b) the Selva region--the low, jungle-covered plains along the eastern, northeastern and southeastern areas of Peru--currently the source of most production, and the area with the largest potential reserves; and (c) the Sierra, intermountain basins, where potential commercial reserves exist but may be difficult and cost- ly to explore and develop. 2.02 Estimates of petroleum reserves made by PETROPERU in 1977 totaled 75C million barrels for proven and prouable, ptimary recoverable reserves of crude oil. The U.S. Geological Survey and other experts estimated for primary recovery of proven and probable reserves only 565 million barrels, but in addi- tion, indicated that about 550 million barrels could be recovered from known reservoirs tnrough secondary recovery methods. Total proven and probable reserves amount to 1.2 billion barrels, approximately 16 years of production at present rates. Estimates of the volume of undiscovered reserves varies widely, from 2 billion to 40 billion barrels. 2.03 Based on the development of these proven reserves and the initiation of secondary recovery projects, which were started in early 1978, Peru should continue to be self-sufficient in petroleum through the mid-1990s. However, this will require investments of about US$1 billion per year through the early 1990s. These investments are expected from PETROPERU and the private interna- tional petroleum companies operating in the country. The government expected that foreign oil companies would play an important part in this effort, but wishes to preserve a significant role for PETROPERU. However, because of its limited financial and technical resources and the enormous investments involved, PETROPERU has had to become deperlent on foreign oil companies for about 75? of the investment necessary to find and develop new oilfields in the Selva. The country's ability to attract approximately US$1.0 billion in additional invest- ment funds to sustain self-sufficiency through the 1990s will require adopting and maintaining appropriate sector policies and incentives. 2.04 The Peruvian Government's relationship with foreign oil companies has been rather mixed: continual difficulties culminated in expropriations. A prohibition to hold concessions was enacted in 1969. However, in 1970, Peru changed its policies and established a new framework for foreign companies to participate in the petroleum sector, with the design of the "Peru Model, contract. Under this system, which initially proved very attractive, private companies could explore for oil and operate on the basis of a 50/50 split of production with PETROPERU. 2.05 An important initial petroleum discovery made in the Amazon basin gave rise to high expectations regarding the hydrocarbon potential of this area. On 32 the basis of these expectations, the TransAndean Pipeline System was constructed to connect the jungle oilfields to the coast. The initial successes were followed by the drilling of several unsuccessful exploratory wells and the departure of many foreign companies exploring in the area. As a consequence, output from Peru's oilfields stagnated through the mid-1970s. 2.06 In 1977-78, the government made new efforts to attract private compa- nies to increase petroleum exploration and development activity in the onshore and offshore areas and Amazon basin. However, most companies were not interested because of: the high cost of new exploration in difficult environ- ments; political uncertainty caused by upcoming elections; a possible revision of the 'Peru Model* contract; and the tax system applicable to foreign oil com- panies. Under the new laws, foreign oil companies still had to contract with PETROPERU to explore for and produce hydrocarbons, but the share of production to be retained was linked to the price of oil in international markets and the total volume produced. Foreign companies were to pay their own Peruvian income taxes, thus enabling them to credit such payments against US taxes at least in principle. PETROPERU w&s to receive foreign oil company income tax payments as a capital increase. 2.07 Early in 1979, at the request of the Peruvian Government, Bank missions visited Peru to identify the Bank's role in the development of the petroleum sector. After several visits, an initial financial package was designed with two main objectives: (a) the reinforcement of PETROPERU's technical and finan- cial capabilities, and (b) the provision of advise to the government about an adequate blend of policies and incentives to fully develop Peru's hydrocarbon potential. The appraisal of the project was carried out in May 1979. Negotia- tions were held in Washington on January 9-15, 1980, and the loan was approved by the Bank's Executive Board on March 11, 1980 becoming effective on September 30, 1980. Major Issues Discussed During loan Preparation and Negotiations 2.08 During preparation of the Loan, adequate measures were discussed and undertaken to address the follc.ing issues: (a) PETROPERU's Financial Situation. A major concern during preparation of the project was the financial situation of PETROPERU. Preliminary financial projections made by the Bank indicated that PETROPERU. under realistic production and price assumptio_., would incur losses after tax payments during 1980-82, but would generate small profits in 1983-84. During appraisal of project it was agreed to design a finai- cial recovery program for PETROPERU prior to or during loan negotia- tions. Tentative agreement was reached on a program which included government equity contributions, the government's assumption of a por- tion of PETROPERU's debt, petroleum price increases and a limitation on the company's tax obligations. This program was constructed to sub- stantially strengthen PETROPERU's financial situation over the years so that a progressive improvement in the company's financial indicators would be observed and so that PETROPERU could achieve a debt service coverage rate of 1.1 in 1980, 1.4 in 1981, 1.9 in 1982 and 2.0 there- after and improve its debt equity ratio from .2/8 in 1978 to 60/40 by 1983 (para. 5.05). Such agreement was reflected in Section 4.05(a) of the Loan Agreement. 33 (b) Project Content and Branch Pipeline Component. During preparation of project it was agreed that the branch pipeline expansion be included if, prior to negotiations, the Bank received a clarification of discre- pancies in reserve estimates and a confirmation that increased produc- tion would not damage the reservoir. Later, in order not to delay the processing of the loan, PETROPERU, requested the Bank the eliminate pipeline component since it was taking a longer time to complete its technical analysis that had been envisioned. At the same time, PETRO- PERU asked the Bank to consider including finance for oil well mainte- nance rigs and an increase in the score of seismic work already envis- aged. The Bank, after reviewing the technical and economic justifica- tions for these components, included them in the project. These new components pluE other adjustments increased the total cost of the pro- ject from the original US$44.00 million to US$50.7 million. (c) Cofinancing. During preparation of the project, its financing plan was drafted on the basis that the Bank would finance virtually the entire foreign exchange component. However, possible cofinancing sources were still to be explored and a firm decision on the amount of Bank financ- ing was to be taken prior to negotiations. Discussions took place with a number of commercial banks without success. In the end, an agreement was reached, at the formal request of the Central Bank, that the Bank should consider financing the full foreign exchange requirement of the project. Because of the difficulties in attracting commercial bank cofinancing on attractive terms, the appraisal mission also recommended that the Bank should increase the loan amount from US$15.0 million to US$32.5 million. (d) Retroactive Financing. During preparation of t"e project it was agreed to include retroactive financing for preparation studies of a secondary recovery project and for advance payments to purchase pumping equip- ment. The retroactive financing would help to avoid any unnecesary delays in proceeding with implementation for the secondary recovery project and would amount to around US$2.0 million. Retroactive financ- ing was not to exceed 101 of the loan. (e) Tax Regime. During appraisal of project, the Bank recommended enact- ment of a new tax regime--which would determine the amount of taxes PETROPERU pays on behalf of contractors. Thus, the government would require that oil companies operating in Peru to file annual tax returns under the General Hydrocarbons Law. Preliminary financial projections showed a very favorable impact on PETROPERU's future financial position. (f) Sector Investment Climate. A major concern during appraisal of the project was the uncertainty of the government's attitude toward foreign investment in the petroleum sector. The Bank mentioned to the govern- ment the possibility of reconsidering its involvements and received a positive view from the government recognizing the importance of foreign investments for the development of the petroleum sector in Peru. Based upon this positive attitude, the Bank management recommended that the Loan be approved. In order to assist the government in developing adequate sector policies, the Bank proposed inclusion of a study of sector investment reouirements and alternative incentive system for foreign investors and regular discussions with the government and PETROPERU on their sector development policies. 34 (g) The Borrower. During appraisal, the Bank recommended that the loan should be made directly to PETROPERU as the entity responsible for project implementation, rather than to the Government of Peru for on- lending to PETROPERU. If the loan were made directly to PETROPERU, the problem of the Borrower's creditworthiness became a central issue and the Bank's ability to press the Government of Peru to take action on a number of critical policy matters aimed at restoring PETROPERU's finan- cial position and creditworthiness would be considerably enhanced. Making the loan directly to PETROPERU; would also accomplish: improve- ment of PETROPERU's technical capabilities, provision of a vehicle for implementing a vigorous financial recovery plan, mobilization of finan- cing from other financial institutions for other project investments. Appraisal Objectives 2.09 The Petroleum Production Rehabilitation Project was designed (a) to increase Peru's oil production in the short term by rehabilitating production operations under control of PETROPERU; (b) to enhance Peru's medium-term petro- leum production capacity by undertaking detailed seismic surveys in known pro- ducing areas of northeastern and central jungle and by preparing a secondary recovery in!estment project to be implemented in the earl.y 1980s; and (c) to strengthen the financial and technical capability of PETROPERU. 2.10 More specifically, the project consisted of: (a) Installation of 35 pumps to provide ertificial lift to existing wells in 4 reservoirs located in the northern jungle area; the a2quisi'ion of 2 maintenance rigs to service wells in the jungle areas; and the ini- tiation of studies to improve the exploitation efficiency of these reservoirs; (b) Installation of various types of pumping systems to reactivate primary production from 300 old wells in the coastal fields, (c) Expansion and updating of a feasibility study for a secondary recovery project in the Brea-Parinas area on the Costa; (d) Acquisition of 2,100 line kilometers of seismic surveys to be done in 2 phases and processing of the information thus obtained; and (e) Consultancy services and training to strengthen PETROPERU both finan- cially and technically, and to study future sector investment require- ments and petroleum pricing policy. 2.11 Artificial Lift for North Jungle Operations. These fields produce about 20,000 b/d. Originally, sufficient pressure was available to allow pro- duction without recourse to any artificial help; however, the heavy nature of the oil and the limited gas in the solution has restricted its natural flow. Pumping equipment was installed in order to maintain sufficient pressure to produce at maximum capacity. ?FTROPERU has acquired 12 pumps with its own resources. Approximately 35 additional pumps would be financed under the pro- posed project. With this equipment, production would increase in the first year of operation by approximately 18,500 b/d--93Z greater than the production level of these fields before implementa.ion--and will thereafter decline by approxi- mately 20Z per year. PETROPERU acquired two rigs to maintain and service wells 35 in the jungle and improve their production. Finally, reservoir simulation stu- dies enabled PETROPERU to exploit these fields efficiently in the future. 2.12 Reactivation of 300 Wells in PETROPERU's Coastal Operations. Signifi- cant primary production was recovered from wells in the Talara area that has * been shut down as marginal in the period prior to the increase in international oil prices. Three hundred wells were reactivated under this project with the installation of new pumping equipment. PETROPERU identified the wells to be * reactivated and selected the specific type of pumping equipment to be used. 2.13 Feasibility Study for a Secondary Recovery Project. PETROPERU planned a secondary recovery project in the Brea-Parinas area to recoveL some 40 million barrels of oil. A feasibility study was prepared and considornble information collected. However, the costs must be updated, the scope of the proposed pro- ject must be defined and the design work done. This would require approximately 200 months of consultancy services by a qualified firm and would take 4 to 6 months to complete. The cost of consultants is estimated at about US$9,000 per month. The qualifications of the consultants selected for this, and other tech- nical assistance components of the project, as well as the terms and conditions of their employment, need to be acceptable to the Bank. 2.14 Seismic Survey. Because of its firancial difficulties, PETROPERU's exploration activity declined significantly. No exploratory drilling had been done since early 1978 and seismic work was curtailed. Since the discovery of new reserves was urgent, PETROPERU planned to reexplore two producing areas 3f the jungle. The initial 1,600 km. phase of this program, financed by the loan, focused on potential oil bearing structures which had not been fully delineated. A second, more detailed, phase covering 500 km would be carried out after agree- ment between the Bank and PETROPERU that a second phase was justified based on a review of the results of the first phase. 2.15 Technical Assistance and Training. About 110 consultant months of techni,al assistance at an estimated US$9,000 per month was to be provided (a) to improve PETROPERU's financial and technical capabilities and (b) to study the overall dev3lopment of the petroleum sector. Under item (a), consultants assisted PETROPERU in strengthening its financial administration, accounting and management information practices and procedures. The company's fixed assets were also inventoried. Under item (b) of this component, a study of the Peru- vian petroleum sector's future exploration and investment requirements--and of the total optimal institutional framework for the sector--was made. The domes- tic pricing of hydrocarbons was also examined. 2.16 The National Development Finance Corporation (COFIDE) assisted PETRO- PERU in the selection of consultants for the technical assistance. It also helped supervise and review their work (Section 3.02(c) of the Loan Agreement). PETROPERU retained consultants to carry out the financial, accounting and man- agement information studies. Upon completion of these studies, PETROPERU exchanged views with the Bank on their findings and on a program to put their recommendations into effect (Section 3.07 of the Loan Agreement). The govern- ment established a committee--to include representatives of the Ministry of Economy and Finance, COFIDE and PETROPERU--to coordinate the petroleum sector development studies. Upon completion of the sector development studies and 90 days before the end of each year for three years thereafter, the government, COFIDE and PETROPERU exchanged views with the Bank on the actions to be taken to 36 implement the studies' recommendations (Sections 3.08(b) and 4.07 of the Loan and Guarantee Agreements, respectively). 2.17 In addition to the studies, about 220 consultant/months of experts' services, at an estimated US$9,000 per consultant-month, was provided: (a) to advise PETROPERU's production and field staff on resolving day-to-day operation- al difficulties that became more acute as a result of the loss of experienced operational staff; (b) to maintain pumping units that were procured under the proposed project; and (c) to train PETROPERU's operating personnel in reservoir engineering practices and in production control procedures. III. PROJECT IMPLEMENTATION 3.01 Project implementation was planned for a three-year period between 1980-82. PETROPERU was in charge of carry.ig out all project components, and was to be assisted by COFIDE in the execution of the financial, as well as the sectoral investment and petroleum pricing studies. The project got under way more slowly than expected because of the complexity and diversity of the compo- nents. The project had serious delays that started with the signature and ef- fectiveness of the loan, as result of the change in government in the mid-1980. More delays were experienced later during the implementation of some of the components. For these reasons, the closing and completior dates for the loan were moved from the original date (March 31, 1983) to August 31, 1985. There were delays caused by different problems, but procurement issues (para.3.23) severely affected implementation of several components. Also, there were delays in the implementation caused by natural disasters originated by heavy rains and floods triggered by the climatic phenomenon called "El Niflo which struck Peru late in 1982 and la:;ted for almost one and half years. It should be emphasized that the delays in completing the field operations of some of the project compo- nents, did not materially affect the benefits expected from the project, since PETROPERU reached its production targets on schedule by inaking maximum use of available resources and judiciously using its own financial resources as well as those provided by the Bank through the loan. Artificial Lift or North Jungle Operations 3.02 In March 1979, PETROPERU had started installing electrocentrifugal. pumps and by the end of 1980, a total of 12 pumps had been instnlled with good results. Production statistics show that in March 1980 about 47 producing wells existed in the northern jungle oil fields. From this total, 20 wells still were flowing naturally, 21 were shut-in, 4 produced intermittently, and 2 were being worked over. At that time, of 12 pumps that had been purchased, 5 were already working and 7 were to be installed. On the basis of the statistics, it was determined that 35 new pumps were needed in those wells that were either shut-in (21 welL) or producing intermittently (5 wells), and also in about 10 flowing wells that had low productivity. These 35 pumps had to be installed as follows: 17 in the Corrientes field, 10 in Pavayacu, and 4 each in Capirona and Yanayacu fields. Seventeen pumps were needed urgently for installation in 1981; the remainder could be installed in 1982. With the installation of all the 35 pump- ing units, northern jungle production was to be increased by about 18,500 b/d. In addition, PETROPERU was required to purchase one work-over and one well-serv- icing unit to be able to install the new pumping equipment and to service the wells in the north jungle oil fields. Reservoir simulation studies were carried 37 to enable efficient monitoring of development activities of these fields in the future. Annexes 1 and 2 show Peruvian and PETROrERU oil production as well as the volume balance. 3.03 The implementation of this component was delayed during the acquisition of the two units for production operations due to public international tendering under the Peruvian laws, which are excessively complicated. Problems related with shipment of the units to Peru caused additional delays. The acquisition of the electrocentrifugal pumps was also delayed, as well as the acquisition of two electro generator pumps. Reactivation of 300 wells in PETROPERU Coastal Operations 3.04 PETROPERU prepared an initial listing of 558 inactive wells out of a total of 2,519 shut-in wells. The best 300 well candidates were chosen for reactivation. These wells were located in the fields of Ancha, Lomitos, Verdun Alto, Silla, Overals, Pueblo, Rio Verde, San Pedro, Tablazo, La Brea, and Pari- nas. Since most of these inactive wells had been producing as pumpers before, it was easy to determine the type and kind of pumping equipment most appropriate for each well. For surface facilities, it was estimated that based on well location as identified on geographic maps of the area, that on the average each well required about 3,000 feet of producing gathering pipelines, and on that the average depth was 2,500 feet per well. Crude oil to be recovered from these 300 wells was estimated at 1,829 million barrels of primary proven reserves to be recovered over 10 years. 3.05 There were serious delaya in the implementation of this component, mainly caused by the natural disasters that swept the northwest coastal opera- tions of PETROPERU. Also lengthy bureaucratic transactions for carrying inter- national competitive bidding for the supply of equipment and materials, the delivery of purchasing requests by suppliers, and slow execution of most works by most of the Peruvian contractors hired by PETROPERU added to the delays. Feasibility Study For a Secondary Reserve Project 3.06 The study was undertaken by a U.S. consultant reservoir engineering firm. The contract with this firm was signed on October 28, 1980, with a slight modification in its original scope, so that PETROPERU became directly responsi- ble for the subsurface reservoir geological studies because the consultant firm recognized its lack of expertise in this area. Most of the studies and reser- voir modeling were conducted in the U.S., but because the geological studies were performed in Peru, the engineering firm personnel had to be transported to Peru to gather detailed technical information generated by PETROPERU. The study was successfully completed in September 1982, when the consultant firm presented its final reports. Seismic Survey 3.07 The first phase of the seismic program was subdivided into: (a) 800 line kilometers to cover certain areas on Block 8 with 2-D seismic surveys; and (b) 800 line kilometers to cover large areas on Blocks 31/35 with 2-D seismic surveys. The execution of phase (a) was undertaken by the consortium formed by a foreign seismic contractor, a Peruvian firm performing field work, and another foreign contractor that processed data obtained from the blocks. The phase (b) contracts were won by U.S. firms, for the field work, and by another U.S. firm 38 for the processing of data. After the surveys were completed, the total area covered was a as follows: (a) on Block 1, only 656 line kilometers were shot over the areas of: Pucayacu, Chambira, Copalillo, Sungaroyacu, Huangana, Aerico, Aerico Norte, Trompeteros Sur, Carina and San Juan; and (b) on Blocks 3/35, only 713 line kilometers were shot over the areas of Huaya, Holanda, Cashiboya Sur, Callaria, Pisqui, Rashaya, Venadal, Juantia, Santa Ana and San Alejandro. 3.08 The second phase was only conducted on Block 1 over the San Juan struc- ture, where 158 kilometers of a 3-D seismic survey were shot using 7 quadrangu- lar loops. The overall supervision of the field work and of the computerized processing of data was performed by a special team of geophysicists from PETRO- PERU's Geophysical Division, who set up a task force which was constantly in the field through a rotating group of personnel. The supervision of the processing work was made easier because both contractors had established adequate process- ing centers in Lima, Peru. This project component was delayed by weather, rugged topography and the remoteness of the area. Technical Assistance and Training 3.09 COFIDE assisted PETROPERU in the selection of consultants for the tech- nical assistance work and helped in supervising and reviewing the results of the studies. 3.10 In regard the technical assistance aimed to improve PETROPERU's finan- cial and technical capabilities, objective (a) (para. 2.15) -- a study was con- ducted by a U.S. consulting firm to analyze the structure and organization of PETROPERU. The study provided diagnosis of the main weaknesses in PETROPERU's organization and presented recommendations for the role of PETROPERU in the national objectives for the development of the sector at the present and in the future. A separate study was awarded to the same consulting firm to implement the recommendations. After the final presentation of the study, the Boards of Directors of PETROPERU became a decentralized functional institution that could act as a private company. 3.11 The study of the financial administration system of PETROPERU, also related to the above objective, was performed by a U.S. consulting firm. The programs fcr the study was divided into two main activities: (a) diagnosis and formulation of an action plan: and (b) implementation. As a result of the study, an action plan was conceived, consisting of 89 generic recommendations, grouped as follows: (a) to define the financial responsibility at level of the organization; (b) to replace the existing centralized accounting system for a more modern decentralized system; (c) to adopt a standard cost system for all the refining and petrochemical processing plants, (d) to establish a formal administration system, providing adequate training to all personnel involved; (e) to divide the financial support in two separate areas: accounting and financial planning. Agreement was not reached with the consulting firm on the execution of the implementation and the Board of Directors took the decision to have the implementation condurted directly by PETROPERU with the assistance of individual consultants. 3.12 The study for establishing and maintaining and up-to-date inventory of fixed assets was performed by a Peruvian accounting firm. The study presented a diagnosis of deficiencies of the existing system and established a manual for the fixed assets inventory. 39 3.13 The study to help PETROPERU in the development of alternative invest- ment plans for 1983-87 and the long term (1988-2000) was performed by a U.S. consulting firm. The study was subdivided in five phases: (a) data gathering; (b) theoretical review of existing projects; (c) analysis and ranking of pro- jects; (d) analysis and formulation of an investment plan; and (e) development procedures for the preparation of future investment plan. The study covered all the investments normally made by PETROPERU in the areas under its normal responsibility, i.e., exploration, production, petrochemicals, transportation, distribution and marketing. However, taking into consideration that explora- tion/production activities are the ones where the largest investments are normally made by PETROPERU and the riskiest of the actual requirements and results of future investments are concerned, the study wts designed to go deeper into these matters. Finally, the study recognized that exploration/production activities had top priority for future investments, since PETROPERU urgently needs to discover new reserves to ensure future supply to meet the petroleum requirements of the country. The study concluded that no new refineries were needed. Likewise, it was concluded that no new petrochemical plants were required. The study was successfully completed and the report was delivered on time after its contents were discussed with PETROPERU and the Ministry of Energy and Mines. 3.14 The study determining the most adequate pricing structure for the country and the national oil company, was performed by a foreign consulting firm, and in coordination with the Ministry of Energy and Mines and PETROPERU. The study concluded that the first step the government must take is rationaliza- tion of petroleum consumption, and that the most effective tool for achieving this objective was allowing prices to reach their true market parity. Based on this premise, the other conclusions of the study were (a) that PETROPERU must obtain adequate income to cover all its operational costs; (b) that PETROPERU must be able to generate enough cash to invest in discovery and development of sufficient petroleum reserves and production to allow meeting future demand of petroleum within the country; and (c) that PETROPERU should not be taxed to a level where heavy taxation would reduce any possibility of adequately covering operating costs and providing enough cash for investments. 3.15 Several alternatives were examined by the working team composed of personnel from the consultancy firm, PETROPERU, COFIDE, and the Ministry of Energy & Mines. At the end, the best alternative analyzed consisted of the following: (a) that the price of gasoline should be increased until a level equivalent to double the import parity value would be reached by January 1985; (b) that these price levels should be maintained in the future; (c) that the price of kerosene for household use should be increased in local currency terms up to a level equivalent to internal inflation; (d) that kerosene prices for household use should be maintained in real terms at least at the price levels prevailing in July 1983; and (e) that the prices for all other petroleum products should be adjusted to reach a level equivalent to import parity value by January 1985. One aspect that probably should have been considered by the study, but was totally disregarded, was to make a detailed evaluation and analysis of PETROPERU's operational costs. 3.16 An additional study to obtain financial advice from specialized insti- tutions for recurring advantageous credits from international lending agencies was not included in the Loan Agreement but was carried out as a result of Bank supervision. This study was performed by a U.S. consulting firm as part of the objective (ii) of the technical assistance. The study was implemented in six 40 steps: (a) identification of possible suppliers, which required the formulation of a list covering all equipment, materials and services (including their prices and/or costs), required by PFTROPERU to implement its investment projects, particularily the Laguna-Zapotal project; (b) preparation of a financial report on PETROPERU, including an economic study of the Laguna-Zapotal project, plus an analysis of the financial structure of the project; (c) definition of a strategy for negotiations with certain international export-import credit institutions, to obtain the best possible conditions, and to identify the minimum amount to be financed by any particular country; (d) visits to the institutions that became candidates for providing credits to PETROPERU, to obtain detailed information on .inancial terms and conditions; (e) follow-up work to make sure that procedures for receiving and evaluating investment commitments from supplier credits and financial institutions would not be misinterpreted or that the terms and condi- tions would not be compared on equal basis; (f) preparation of a final report containing specific recomniendations for the selection of the best proposals to optimize the financial package of the project on the basis of export credits. As a result of the study, PETROPERU was able to negotiate and obtain a financial package from the US EXIMBANK/Morgan Guaranty Trust/Geosource Inc. for a total amount of US$29,750.000 to be used for the acquisition of equipment, materials and services of U.S. origin. Project Cost and Financing 3.17 The total cost of the project was estimated at U'$50.7 million, of which US$32.5 million represented foreign exchange component cGvered by the Bank loan. Customs duties and taxes were estimated at about US$5.3 million. The total project cost ended with an underrun of US$2.0 million, equivalent to less than 5Z, compared to estimated cost at appraisal. Mainly due to lower than anticipated inflation and smaller number of wells rehabilitated. Only US$30.2 million were used out of the original Bank loan, and the remaining US$2.3 million were cancelled upon completion of the project. However, the cancelled account represented those funds that were in the unallocated category (see Annex 3). 3.18 PETROPERU financed the remainder of the total project cost from its own funds, which amounted to US$18.2 million. PETROPERU could not obtain cofinanc- ing on appropriate terms for any portion of this amount and, therefore, there was no need to include a cross-default clause in the legal documents accompany- ing the Loan Agreement. There were provisions in the Loan Agreement for retro- active financing. for an amount of up to US$2.0 million, to cover consulting services to be contracted by PETROPERU after February 1, 1980 for the updating of the secondary recovery studies and down payments on purchasing orders for pumping equipment placed after that date (paragraph 4(a) of Schedule 1 of the Loan Agreement). However, this facility was not used, since PETROPERU had already financed the purchase of some pumping equipment with its own funds prior to the dateline set in the Loan Agreement. Disbursements and Allocation of Bank Proceeds 3.19 Disbursements were made against (a) 100% of foreign exchange expendi- tures and 80% of local expenditures for equipment and materials; (b) 90Z of services for seismic surveys; (c) 90% of expenditures for engineering and con- sulting services, and (d) 100% of foreign expenditures for training. 41 3.20 The rate of disbursement was slower than anticipated at appraisal (see Annex 4). Disbursements actually started in the second quarter of FY81, almost a year after the loan was declared effective. The original disbursement forecast had been made on the basis of the initial project schedule, but since this schedule could not be maintained, disbursement lagged. However, about - 64.61 of the total loan amount had been disbursed by the time of the original closing date, i.e., by the end of FY83. The remainder of the loan was rapidly disbursed during the extension period, with 94Z being accomplished by the end of FY1985, when the project was completed. The undisbursed amount of US$2.0 million was cancelled on December 31, 1985. Performance of Consultants, Contractors and Suppliers 3.21 At the beginning. PETROPERU showed some reluctance to hire consultants on the premise that it had sufficient technical capability to undertake certain studies on its own. However, experience showed that the incremental costs attributable to the hiring of consultants was minimal compared to the benefits of higher oil production and timely completion of the studies with the assist- ance of consultants. For the implementation of the project, PETROPERU employed 10 consulting firms, 8 foreign and 2 national, plus 10 individual consultants, 4 foreign and 6 national. According to PETROPERU, their performance was entirely satisfactory, and this was also the conclusion of Bank staff who supervised the project. The performance of the individual exploration consultants made a sig- nificant contribution toward the training of PETROPERU technical staff. Especially worthwhile were the services rendered by the individual financial consultants who assisted in the implementation of the new financial admrinistra- tion system within PETROPERU's organization. 3.22 All contracts were executed satisfactorily and without undue problems, with possible exception of those related to the natural disasters that affected Peru during 1982-84. Although they were some difficult'es in obtaining timely material supplies, PETROPERU and the contractors and the suppliers cooperated in good faith to overcome the difficulties that had occurred, allowing the project to be completed with the least possible delays. Procurement 3.&3 The procurement for materials and services was obtained through inter- national competitive bidding or limited international tendering in accordance with Bank guidelines. For first-time borrower, PETROPERU understood these prin- ciples well and tried to strictly follow the Bank's procurement guidelines. However, Peruvian laws make these procurement practices excessively complicated and introduce too many outside influences. The selection of consultants and consulting firms was done by PETROPERU with approval of the Bank. Auditing 3.24 PETROPERU's accounting and budgeting systems were inadequate arising from an effort to standardize procedures inherited from International Petroleum Corapany and other companies absorbed by PETROPERU. PETROPERU's internal audit department, under the direction of a Chief Internal Auditor, reports directly to the Board of Director and is subject to audit review by the government's Office of the Controller and Auditor General of Peru. Considerable effort haF been made, as agreed under the loan, to clarify PETROPERU's financial position during recent vars and the accounts have been certified by Peruvian firms of indupen- 42 dent external auditors affiliated with a large U.S. auditing firm. PETROPERU continues to have its accounts audited by independent auditors and submitted to Bank annually. Reporting 3.25 PETROPERU complied with the agreed reporting requirements by forwarding quarterly progress reports on all ongoing project activities. In addition, all requirements concerning procurement of equipment, materials and studies, and those concerning terms of reference for the various studies were duly cleared with the Bank on a nonobjection basis before the start of each operation or study. IV. INSTITUTIONAL PERFORMANCE Background 4.01 The national oil company, PETROPERU, was established in 1969 following the government's nationalization of the International Petroleum Company (IPC), a subsidiary of Exxon. PETROPERU took over the assets of IPC and those of a small government-owned oil company, as well as those of several other privately owned oil firms. Currently, PETROPERU's own operations account for 352 of the country's crude oil production (see Annex 1), 100% of refinery capacity and 98Z of marketing of petroleum products. In addition to conducting all state explo- ration and production activity, PETROPERU owns and operates the TransAndean pipeline and produces petrochemicals and fertilizer. While the government's strategy calls for foreign companies to continue to be the major petroleum pro- ducers, PETROPERU has retained its dominant position in petroleum refining and distribution. Management 4.02 PETROPERU is the largest public sector corporation in Peru, with a total staff of about 9,000. It has a Board of Directors of nine members: three appointed by the Minister of Economy, Finance and Commerce; three by the Minister of Energy and Mines (MEM); one by the Armed Furces and two representa- tives of the employees of PETROPERU. The operations of PETROPERU is divided in five units: (a) northwest operations, including Talara oil field operations, the Talara refinery and petrochemical plants; (d) oil pipeline operations; and (e) the La Pampilla refinery operations in Lima. In general, decision making authority in the company tends to be overly centralized in the Board of Directors, with limited delegation to lower echelons. PETROPERU's senior man- agement iq generally competent and has extensive experience in the petroleum industry in Peru. The middle management, especially in its exploration opera- tions, was weakened by the loss of many technical personnel due to low salary levels compared to those of Peruvians, employed by private petroleum companies in the country. However, in 1981 PETROPERU was given greater autonomy to improve its salary structure, and as a consequence, its salary scale are now competitive with those of the private petroleum companies in Peru. Periodical salary increases helped to attract back some of its former experienced employees. Training of profe3sionals and technicians has proceeded satisfac- torily with outside consultantv. 43 4.03 The overall organization and management of PETROPERU at the beginning of project implementation were judged to be equivalent to those of any medium- sized petroleum company, but it was felt that they needed to be greatly improved in order to run the large company that PETROPERU had become after the important crude oil discoveries made in the jungle areas and the successful results of share contracts entered into with some major oil companies. As a result, of the one of the project components (para. 3.10-3.11) was completed and the ensuing actions were properly implemented that led to the conversion of PETROPERU into a decentralized functional corporation that could act as a large, fully integrated, private petroleum company. Today, PETROPERU has improved its organ- ization and management efficiency, including its ability to deal with the pro- blems of over-centralized decision making in the Board of Directors. PETROPERU has been reorganized into seven management areas: Finance, Exploration/Produc- tion. Logistic/Planning, Human Resources, Planning Marketing/Transportation and Industrial Production. However, its growth has been severely constrained both by the overall conditions prevailing in the oil industry since November 1985 resulting from reduced demand for crude oil and by the country's financial dif- ficulties. Bank Performance 4.04 The project was the Bank's first petroleum lending operation in Peru involving rehabilitation and drilling and, consequently, more staff effort went into preparation, appraisal and implementation of the project than would be the case with a more conventional project. Bank staff undertook 12 supervision missions between May 1980 and March 1986. The interval between missions depend- ed upon the need for Bank staff to be on hand for specific project review and approval requirements mainly connected with the reactivation of wells, and seis- mic and technical assistance programs. 4.05 The Bank's relationship with the borrower was excellent throughout the execution period. Bank staff worked directly with the Borrower and showed flexibility when conditions warranted. PETROPERU managers expressed apprecia- tion for the Bank's willingnes to incorporate such flexibility and for the tech- nical advice provided by the staff, especially on defining an appropriate stra- tegy for future exploration and investment requirements by PETROPERU and the sector; defining the optimal institutional framework for the sector and PETRO- PERU; and strengthening of PETROPERU's financial administration. V. FINANCIAL AND ECONOMIC PERFORMANCE Financial Situation 5.01 Aside form the loss of professional staff, PETROPERU's most serious problem in recent years has been financial. At appraisal, a number of factors resulted in a financial crisis which required government action to help PETRO- PERU avoid bankruptcy. These factors were (a) price subsides to consumers, (b) rapidly increasing tax payments on behalf of foreign petroleum company con- tractor, and (c) large investments for the TransAndean oil pipelie financed primarily by debt. The government took a series of measures to help resolve PETROPERU's financial problems, to restore its solvency and to enable the Bank to make the loan under review. These measures included a program of frequent domestic price increases for petroleum products; government assumption of the '4 servicing of a portion of PETROPERU's external debt, including short, and medium-term obligations; and changes to the law that required PETROPERU to pay the income tax of foreign oil companies in Peru.2 These measures, plus equity infusions, helped PETROPERU to overcome its earlier financial crises. 5.02 The Loan and Guarantee Agreements established government commitment to support a long-term financial stability and comprehensive program of financial recovety to PETROPERU, whose objectives were (a) to strengthen PETROPERU's capi- tal structure through equity infusions; (b) to assure PETROPERU a minimum debt- service capability, especially during the critical 1980-82 period; (c) to main- tain PETROPERU's liquidity. The government complied with this plan and in 1980 started to strengthen PETROPERU's capital structure by making an equity contri-- bution of US$60.8 million and assuming PETROPERU's short debt obligations, as the result of price subsidies previously borne by the institution. These obli- gations amounted to around US$100.0 million. The Loan documents made provision (Section 2.03 (a), for a capital contribution to PETROPERU of at least US$45.0 million in 1980, and another US-30.0 million in 1982. Actual contribution made by the government amounted to US$240.0 million in 1980, and US$70.0 million and US$78.0 million in 1981 and 1982, respectively. 5.03 With regard to the burden of price subsidies, it was agreed that the government should increase ex-refinery domestic prices by 10Z in each quarter of 1980. However overall domestic prices increased around 60% in the same year. The price policy was thereafter to completely eliminate subsidies and enable PETROPERU to self-finance a reasonable portion of its investment program. As a result of agreement (Section 4.03 (c) of Guarantee Agreement) the government increased consumer prices for petroleum products by an average of 63Z in 1981, 107 in 1982, 7Z in 1983, but in 1984 and 1985 it decreased them by 77 each year. 5.04 PETROPERU's income statement, balance sheet and financial indicators for the period of 1980-85 are presented in Annexes 5-8. PETROPERU's revenues have declined over the period 1982-86. A major cause has been the low share of the controlled domestic prices for petroleum products which PETROPERU receives. While the total weighted average prices for controlled products was about US$37/barrel in 1985, PETROPERU's share was only US$13/barrel, or 36% of the total average price. PETROPERU's operations had genezated huge net losses during 1983-86, from US$9.0 million to US$197.2 million, due to a decrease in domestic sales as result of the difficult economic situation and the effects of the national pricing policy, as well as to increase operating costs due to high inflation. PETROPERU has compensated in part for losses in the domestic market by gains in the export market, where crude oil and petroleum products are sold at spot prices. Financial Covenants 5.05 As part of the Loan Agreement (Section 5.05 (a) and (b) PETROPERU was to maintain a minimum debt service coverage ratio of 1.1 in 1980, 1.4 in 1981, 1.9 in 1982 and 2.0 thereafter. The actual ratios obtained by PETROPERU for debt service coverage were 1.0 for FY80, 1.2 for FY81, 2.4 for FY82 and 1.8 for FY83 (See Annex 6). PETROPERU was also not to incur any debt without the Bank's agreement, ii such debt would cause its debc/equity ratio to exceed 75/25 in 2/ Under the new arrangement, foreign oil companies now pay their taxes directly to the government and these taxes are transferred to PtirOPERU through government equity contribution. 45 1981, and 60/40 thereafter (Section 5.07 Loan Agreement). Actual ratios achieved by PETROPERU on its debt/equity were: 77/33 in FY81, 81/29 in FY82 and 82/18 in FY83, on the basis of inflation adjusted accounts. The government authorized PETROPERU to borrow US$125.0 million from foreign private banks as of December 31, 1981, but this authorization was again and again reissued by the government in the ensuing years, so that PETROPERU maintained an active line of credit during the duration of the project. 5.06 To insure that PETROPERU would have sufficient liquidity to neet its working capital requirements, the government (on the basis of financial state- ments for FY81) was required to discuss with the Bank the convenience of making contributions to PETROPERU's equity to cover working capital needs. (Section 4.07 of Guarantee Agreement). However, in addition to an automatic equity injection of US$73.0 million made during FY82, no other government contribution was possible. Nevertheless, during the project life, PETROPERU was required to maintain a quick ration of more than 0.6 in 1980, 0.7 in 1981, 0.9 in 1982 and 1.0 thereafter (Section 5.06 (c) of Guarantee Agreement). In actual practice the ratios maintained by PETROPERU were as follows: 0.8 for FY80, 0.5 for FY81, 0.5 for FY82 and 0.5 for FY83. The quick ratio covenants for 1982 and 1983 had been reduced to 0.7 for FY82 and to 0.9 for FY83, as a consequence of later agreements between PETROPERU and the Bank in connection with Loan 2195-PE. It should be noted, however, that although PETROPERU had apparently met most of the key financial targets set as covenants by the Guarantee and Loan Agreements, the figures quoted do not fully reflect the underlying weakness of PETROPERU's finances during the 1980-85 period. While these results indicated that govern- ment had taken the necessary measures to achieve the financial improvements envisioned, further corrective steps still remained to be taken in the ensuing years to ensure long-term financial viability of the company. Economic Evaluation 5.07 The economic rates of return of the two production rehabilitation com- ponents, the artificial lift for the northern jungle operations, and the reacti- vation of 300 wells in the coastal operations, were estimated at the time of appraisal to be very high (estimated at above 1002), due to the incremental nature of the investments. In both cases, these projects components have turned out to be as highly economic as predicted, and both ended up with economic rates of return above 100Z. This return was possible because well productivity was as high or slightly higher than expected; maintained costs within original esti- mates; and prices for the crude oil were similar to those anticipated. These project components benefited from existing infrastructure, since wells had been previously drilled, the recoverable reserves were well established and the gathering lines, as well as transport pipeline systems were already in place. Additionally, the project's incremental production had been exported, and even if it were only to substitute for crude oil imports, the total foreign exchange earnings (or savings) over the first ten years of the project's life would be almost US$780.0 million at current prices. 5.08 Further benefits can be identified from the project, although some are unquantifiable such as having helped the PETROPERU through financial difficul- ties and its technical capabilities. The studies conducted under the project, plus the seismic surveys, have laid the foundation for reinitiating exploration and secondary recovery that would enable PETROPERU to retain self-sufficiency for Peru. Also, the sector investment study has provided excellent guidance both PETROPERU and the government in planning for the future development of petroleum sector. 46 VI. CONCLUSIONS 6.01 Overall, the objectives of the project were essentially accomplished. There were delays in the start as well in the implementation. The slow start was due to management weakness in PETROPERU and lack of familiarity with the Bank procedures, particularly on procurement, disasters and other external influences. All the components were successfully completed, except for well rehabilitation in the northern coastal fields, which left 66 wells short of the target of 300. 6.02 The four major objectives were successfully achieved as follows: (a) The increase in Peru's oil production exceeded expectations in the short term. Jungle production increased from 21,800 b/d in 1980 to 42,500 bbls/day in July 1985, as a result of the installation of submersible electrical centrifugal pumping equipment in the producing wells, well-servicing and workover units, and the initiation of detailed reservoir studies. Rehabilitation of previously abandones wells increased production from less that 100 bbls/day to more that 600 b/d (with a total production of 393,000 barrels as of 12/31/85 compared to estimate of 400,000 barrels at appraisal). (b) Knowledge about Peru's medium and long-term crude oil reserves and future production capacity was enhanced through the seismic surveys. Confirmation of new structures compared to expectations; some addition- al structures have been identified but need to be confirmed by more detailed surveys. (c) Peru's medium and long-term crude oil recoverable reserves and produc- tions capacity were increased through the preparation of a primary and a secondary recovery project. Laguna-Zapotal financed subsequently under Loan #2195-PE, is the only project executed by PETROPERU that will increase production in the short term. The Talara secondary reco- very will be the only project prepared by PETROPERU that could increase production in the medium term. (c) PETROPERU's technical, organizational and financial capabilities were successfully upgraded through hiring of foreign consultants and consul- tant firms, effective transfer of advanced technology to PETROPERU, organizational studies that resulted in a more rational and decentral- ized organizational structure, and consultants' studies that defined measures to improve PETROPERU's financial, accounting and management information systems. Several of these measures have been implemented (e.g., inflation adjusted accounting, budgeting procedures, etc.), However, considerable further effort would be needed to implement all the recommendations made by the consultants. Finally, the investment planning study has contributed to a strengthening of the planning pro- cedures used by PETROPERU and to the development of a long-term explo- ration strategy and investment plan. 6.03 During the course of project implementation, Bank staff had to promote a more widespread awareness and willingness among government authorities to cope with the financial problems of PETROPERU because of misguided petroleum products pricing policies and not providing PETROPERU's inadequate share of petroleum 47 products revenue. In general, most of these problems were identified by the Bank at the time of appraisal and conditionality was built into the loan in an effort to encourage both the government and PETROPERU to take remedial actions. Progress was made on some points (e.g., payments of arrears for petroleum pro- ducts used by certain public corporations and pricing of petroleum products) during the execution of the project, but this progress has not been maintained and PETROPERU's finances have deteriorated again in recent years. However, considering the political and economic conditions prevailing in PERU at the time, the Bank did not feel it would be appropriate, nor conducive to any posi- tive results, to exercise any of its remedies to bring about corrective measures. The serious problems of growing public budgetary deficits and public corporation consumer arrears, inadequate petroleum pricing, and insufficient revenues for PETROPERU, were among the principal issues constantly raised in the last two years of project execution by the Bank. 6.04 As a result of the various studies conducted under the project, some conclusions can be drawn as to the strategy for PETROPERU's operation and plan- ning: (a) The major external constraints affecting PETROPERU are primarily a consequence of the lack of control over the pricing of petroleum pro- ducts and its revenue share. (b) The constraining environment within which PETROPERU presently operates not only inhibits decision making and management of long-term strategy, but allows major operational decisions to be taken outside PETROPERU. (c) Based on Bank staff judgement, PETROPERU's day-to-day operations are comparable, in terms of efficiency, to most state-owned petroleum com- panies in South America, making allowances for the difficult environ- ment (especially the jungle areas) in which PETROPERU operates. Some specific areas where operational efficiency could be improved were identified as drilling, mechanical maintenance, refinery-petrochemical plant interface. PETROPERU has begun corrective actions in some of these areas. 6.05 PETROPERU has incorporated most of the recommendation of the overall institutional study. It has established new divisions for planning and special studies, it has separated the functional responsibilities in the Directorate of Production, especially between exploration and operation. PETROPERU has intro- duced many administrative reforms and promoted staff to middle-management posi- tions. In addition, although institution-building had to continue under the follow-up projects, (staff training and quality, financial administration, com- pany's management system) PETROPERU has emerged at the completio'l of the project as a stronger organization through the technical assistance provided and the experience gained by its staff while working on the project alongside the various expatriate specialists. 6.06 PETROPERU's growth has been constrained both by the overall conditions prevailing in the oil industry, particularly the reduced demand for crude oil and refined products, and country's financial difficulties. Nevertheless, due to lack of competition, PETROPERU continues to hold some 952 of the domestic market for petroleum products and is still the largest crude oil exporter in the country, with exports averaging 55,000 b/d. 48 6.07 As a result of the project, PETROPERU prepared a long-range (10 year) operating plan for the period 1984-93, covering exploration, development, pro- duction, refining, transportation and marketing activities, as well as an accom- panying long-range capital investment program. For the first year of planned operations (i.e., 1985), the program included a detailed capital investment plan, which was to be presented in an updated form every year thereafter for all future years. 0 49 Annex 1 PERU PROJECT COMPLETION REPORT PETROLEUM PRODUCTION REHABILITATION PROJECT (LOAN 1806-PE) PERU: CRUDE OIL PRODUCTION (000 b/d) PETROPERU 1982 1983 1984 1985 1986 Northwesz 24.5 15.6 22.6 19.2 19.2 Laguna-Z0potal 7.4 8.2 Total Northwest 24.5 15.6 22.6 26.6 27.4 Selva Norte 28.0 31.0 37.4 40.5 35.6 Selva Central 0.9 0.8 0.8 0.7 0.7 Total PETROPERU 53.4 47.4 60.8 67.8 59.6 Others Oxyl Bridas 18.7 13.2 12.1 10.9 8.9 Occidental 95.4 86.0 84.5 82.2 78.3 Belcol/Petromar 27.6 24.4 26.8 27.6 26.7 Total Others 141.7 1.23.7 123.4 120.7 113.9 TOTAL 195.1 171.1 184.2 188.5 169.7 50 Annex 2 PERU PROJECT COMPLETION REPORT PETROLEUM PRODUCTION REHABILITATION PROJECT (LOAN 1806-PE) PERU: PETROLEUM VOLUME BALANCE (000 b/d) 1982 1983 1984 1985 1986 Production 191.1 171.1 184.2 188.5 177.6 Imports 1.5 6.0 1.9 0.6 4.4 Total Sources 196.6 177.1 186.1 189.1 182.0 Domestic Sales 128.6 111.3 114.1 109.3 117.4 Exports 65.8 57.5 65.6 76.3 61.3 Refinery Cons.Invent.Var. 2.2 8.3 6.4 3.5 3.3 Total Sales 196.6 177.1 186.1 189.1 182.0 51 Annex 3 PERU PROJECT COMPLETION REPORT PETROLEUM PRODUCTION REHABILITATION PROJECT (LOAN 1806-PE) SUMMARY: PROJECT COSTS 1/ (US$ Million) Total Sub-Project Local Foreign Estimated Actual 2/ 1. Production Rehabilitation 11.8 12.2 24.0 24.0 (a) Artificial Lift 4.2 7.7 11.9 24.0 (b) Reactivation 300 wells 7.6 4.5 12.1 2. Development Ne.. Production Potencial 2.2 11.8 14.0 14.0 Sub-Total 14.5 26.5 41.0 41.0 Physical Contingencies 1.7 2.8 4.5 3.5 Price Escalation 2.0 3.2 5.2 4.2 TOTAL 18.2 32.5 50.7 48.7 PROJECT FINANCING US$ Million) PETROPERU 18.2 -- 18.2 18.2 IBRD 32.5 32.5 30.5 TOTAL 18.2 32.5 50.7 48.7 1/ Includes about US$5.3 in million customs duties and taxes. 2/ Actual costs distributed in foreign and local costs are not available. 52 Annex 4 PERU PROJECT COMPLETION REPORT PETROLEUM PRODUCTION REHABILITATION PROJECT (LOAN 1806-PE) SCHEDULE OF DISBURSEMENTS (US$ Million) FISCAL YEAR CUMULATIVE DISBURSEMENTS AND QUARTER APPRAISAL ACTUAL AS Z TOTAL ACTUAL ESTIMATE OF APPRAISAL EST. FY81 - 4.0 - FY82 12/31/81 2.9 21.5 13.5 03/31/82 5.3 24.5 21.6 06/30/82 9.5 28.5 33.3 FY83 09/30/82 14.0 31.5 44.4 12/31/82 19.5 32.5 60.0 03/31/83 20.0 - 60.0 06/30/83 21.0 - 64.6 FY84 09/30/83 21.7 - 66.8 12/31/83 25.3 - 77.8 03/31/84 26.0 - 80.0 06/30/84 26.2 - 80.6 FY85 09/30/84 27.7 - 85.2 12/31/84 29.2 - 89.8 03/31/85 29.9 - 92.0 06/30/85 30.5 - 92.0 06/30/85 30.5 - 94.0 FY86 8/31/85 30.5 - 94.0 53 Annex 5 PERU PROJECT COMPLETION REPORT PETROLEUM PRODUCTION REHABILITATION PROJECT (LOAN 1896-PE) PETROPERU'S KEY FINANCIAL INDICATORS 1/ (US* M11llon) 1980 1981 1982 1983 1984 1986 Total Income 1,183.6 1,818.2 1,441.7 1,299.9 1,306.2 1,248.3 Net Earnings 23.7 1.7 6.3 32.4 8.7 41.2 Equity 339.6 299.5 216.6 163.2 78.4 65.4 Total Assets 1,611.4 1,415.7 1,200.2 971.6 912.1 Total Liabilities 1,271.8 916.2 983.7 808.4 702.2 846.7 Current Assets 404.5 430.4 437.5 411.1 363.3 520.4 Current Liabilities 431.2 610.6 553.9 472.6 404.8 519.1 Exports 5682.2 553.6 544.5 419.9 505.9 553.9 Tmports 40.6 33.7 39.1 90.1 34.1 18.1 Domestic Sales 5681.9 706/2 839.1 830.5 757.4 654.4 1/ The above indicators represent only historic data. Figures have been only partially adjusted for inflation. 54 Annex 6 PROJECT COMPLETION REORY PETROLELM PRODUCTION RMABILITATION PROJECT (LOAN 1806-PE) FIWMIAL RATIOS: ACB& a.lA ll 1/ Actuat Recom. Actual Recom. Actual Recom. Actual Recom. Actual R-scom. AculRm Debt service 1.40-1.10 1 45-1.40 1.70-1.90 1.34-2.00 1.57-2.00 1.67-2.00 Ratio Quck Ratio 0,57-0.60 0.29-0.70 0.43-0.90 0.40-1.00 0 46-1.00 0.61-1.00 Debt/Equity Rat;. 72/28 None 77/23 75/25 81/19 7(- 30 82/18 60/40 81/19 60/40 90/20 60/40 OTHER KEY FINANCIAL RATIOS EARNINGS RATIOS 1980 Im Im Im 1984 19g Net/Tota? Earnings 0 020 0 001 0.004 0 025 0 007 0.033 Net/Earnings/Equity 0 069 0 006 0 029 0 198 0 111 0 630 Net/Earnings/Total Assets 0 015 0 001 0 005 0 033 0 011 0 045 FINANCIAL RATIOS Current Assets/Current Liabilities - 0 938 0 843 0 789 0.869 0.899 1 002 Current Assets - Inventories = Current Liabilities 0.529 0.347 0.373 0.401 0.425 0.549 Liabilities/Equity . 3 745 3.059 4 953 8.95 12.946 Inflation S 60 8 72 7 72 9 125 1 115 5 156.3 Devaluation 36.6 48.4 95.2 129.5 150.8 144.8 1/ For celculation of the above ratios, it was used data from Annex 5. 55 Annex 7 PERU PROJECT COMPLETION REPORT PETROLEUM REHABILITATION PROJECT (LOAN 1806-PE) PETROPERU: BALANCE SHEET 1/ (US$ Million) Assets 1983 1984 1985 1986 Current Assets 568.1 471.3 703.9 652.4 Fixed Assets 2,582.2 2,446.2 2,565.4 2,727.2 Accumulated Depreciation 1,353.1 1,486.1 1,743.6 2,062.4 Net Fixed Assets 1:229.1 960.1 821.9 664.8 Other Assets 132.6 131.4 165.7 153.5 Total Assets 1,929.8 1,562.8 1,61.5 1,470.7 Liability and Equity Current Liabilities 475.0 406.1 571.0 724.2 Long-Term debt 430.4 383.5 485.9 614.4 Minus Current Portion 97.9 89.6 159.2 307.8 Long-Term Debt (Net) 332.5 293.9 326.7 306.6 Length of B. Fund 1.4 1.3 1.4 15.2 Pension Fund 3.6 2.2 1.7 3.2 Total Liabilities 812.5 703.5 900.8 1,049.2 Equity 1,117.3 859.3 790.7 421.5 Total Liability & Equity 1,929.8 1,562.8 1,691.5 1,470.7 1/ Above data include fully inflation adjustment that was introduced into PETROPERU's financial statement at the end of project implementation 56 Annex 8 PERU PROJECT COMPLETION REPORT PETROLEUM PRODUCTION REHABILITATION PROJECT (LOAN 1806-PE) PETROPERU: INCOME STATEMENT 1/ (US$ Million) Revenues 1983 1984 1985 1986 Domestic Sales 809.5 730.7 624.4 721.5 Export Sales 406.8 487.4 543.8 250.4 Other Revenues 51.2 42.9 24.8 14.2 Total Revenues 1,267.5 1,261.0 1,193.0 986.1 Operating Expenses 1,236.7 1,385.6 1,244.7 1,180.2 Operacing Income 30.8 (124.6) (51.7 (194.1 Interest Long-Term Debt 49.7 39.7 32.3 35.0 Interest Income 16.7 24.6 13.9 11.1 Net Interest Expenses 33.0 15.1 18.4 23.9 Non ?perating Gains (loses) (5.8 (13.2) 30.3 0.8 Income Before Tax (8.2) (152.9) (39.8 (197.2) Income Tax 1.0 8.8 31.6 (197.2) NET INCOME (9.0 (161.7) (71.4) (197.2) 1/ Above data included fully inflation adjustment that was -'atroduced into PETROPERU's financial statement at the end of project implementation. 57 ANNEX 9 PERU PROJECT COMPLETION REPORT PETROLEUM PRODUCTION REHABILITATION PROJECT Glossary of Technical Terms 1. Anticline. Rock formation upfolded into an arch; a common geologic structure favorable for accumulation of oil and gas. 2. Associated gas. Gas produced along with oil. In the reservoir the gas provides the drive mechanism needed to force oil to the surface through a well. On reaching the surface, gas is removed and transported separately. 3. Basement (rock). Hard (igneous) rocks occurring below sedimentary formations. Generally do not contain petroleum. 1,. Basin. A geologic region containing a thick accumulation of sedimentary rocks generally considered a favorable area for petroleum exploration. 5. Darcy (Millidarcy). Unit of measure of a fluid's ability to flow through a rock. 6. Dry Hole. An unsuccessful well. A well drilled to a certain depth without finding commercial quantities of oil or gas. 7. Extension drilling. Drilling in semi-proven areas adjacent or near a producing oil field for the purpose of extending the productive limits of a field. 8. Flowlines. Piping in a production system which gathers oil from individual wells. 9. Fracturation. Artificially opening up a formation to increase permeability and flow of oil to the bottom of a well. 10. Infill Drilling. Wells drilled within an area already delimited by producing wells. 11. Intercalation. The existence of one or more layers between other layers, e.g., the presence of sheets of lava between sedimentary strata. 12. Pe-meability. Property of a rock that reflects a fluid's ability to flow through it. A tight rock, for example, would have zero millidarcy. while a rock with high permeability would have, say, 1,000 millidarcies. IBRD I 7i PE R U 7V W4 sePTesR 9 Petroleum Sector NORTHERN JUNGLE OPERATIONS 2- Existing oil fields: c AMvo OCCIDENTAI PETROPERU Occidental concession areas - Pipelines Mar~ Pump stations o Terminals -- Rivers le. Len P u m p 'S Gathering, k a / R olee, VALENCIA PAVAYACU Anfhco 0- CAP/RONA Iquitos termin roMPEEROS TOS Proposed pump station 2 Soramuro 2 Pump station I IOEESD 2 q4P5 4 KILOMETERS 0 20 40 60 80 MILES 0 10 20 30 40 50 b Betronce '.e rA NA YA CC YANAA CUTh.e mrap has bee prep.'reh, the wortdQ.eent.tf exceusewe(, for rhe coneee 04"e. 3. k ottheeaers et the report to , td .ndt boundan~esshown on thes rep de not - rmpr , th, part fh the Word BAk nd Its rfftt. any judgrente en th. degt statue ef any terntory r nendoeent or 6 o Rereru acceptattee ot uhboundrees 78' 774*