India - Petroleum Transport Project

Docment of The World Bank FOR OFFICAL USE ONLY 6-4/ 301/q-/A Repot No. P-5048-IN MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN =N AN AMOUNT EQUIVALENT TO US$340 MILLION TO THE INDIAN OIL CORPORATION WITH THE GUARANTEE OF INDIA FOR A PETROLEUM TRANSPORT PROJECT APRIL 6, 1989 This document has a restricted distribution and may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUIVALENTS Currency Unit - Rupee (Rs) US$ 1 - Rs 14.6 MEASURES AND EOUIVALENTS 1 Metric Ton (mt) - 1000 Kilograms (Kg) 1 Metric Ton (mt) = 2204 Pounds (lb) 1 Meter - 3.28 Feet (ft) 1 Kilometer - 0.62 Miles 1 Cubic Meter 35.3 Cubic feet (cft) 1 Barrel (Bbl) = 0.159 Cubic Meters or 42 Gallons 1 Metric Ton of Oil (330 API) 7.3 Barrels 1 Normal Cubic Meter (NM3) of Natural Gas - 37.32 Standard Cubic Feet (SCF) 1 Kilocalorie (KCal) - 3.97 British Thermal Units (BTU) 1 Bbl/d - 1 Barrel Per Day ABBREVIATIONS ICB - International Competitive Bidding IOC - Indian Oil Corporation LCB - Local Competitive Bidding OIL - Oil India Limited ONGC - Oil and Natural Gas Commission P/L - Pipeline SBM - Single Buoy Mooring System FISCAL YEAR April 1 March 31  FOR OFmICIAL USE ONLY INDIA PETROLEUM TRANSPORT 'R0JE9T Loan and Progect Summary Borrower: Indian Oil Corporation Ltd. (IOC) Guarantor: India, acting by its President Amount: US$340 million equivalent Guarantee Fee: Consistent with the Government's terms for loan guarantees to public sector enterprises. Lending Terms: 20 years, including a five-year grace period, at the standard variable interest rate. Financing Plan: Local Foreign Total ---------(US$ Million)-------- IBRD 47 293 340 Export and Suppliers Credit -- 75 75 IOC 536 58 594 Total Financing Reguired 58 426 1.009 Economic Rate of Return: 26% Staff ARgraisal Report: No. 7588-IN MM: IBRD No. 21079 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.  NEMORAbDUM AND RECO)OENDNTION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED WAN TO THE INDIAN OIL CORPORATION FOR A PETROLEUM IRANPORT PROECT * 1. The following memorandum and recommendation on a proposed loan to The Indian Oil Corporation (IOC) for US$340 million is submitted for approval. The proposed loan to the Indian Oil Corporation would be at the standard variable interest rate, with a maturity of 20 years, including a five year grace period. The Government of India would guarantee the loan. The proposed loan would help finance the expansion of infrastructure for the transport of petroleum and contribute to IOC's efforts to improve the efficiency of its refinery and pipeline operations. 2. Background. Energy remains a critical element in India's strategy for accelerating economic growth. It is one of the main obstacles to faster growth of the industrial sector, where persistent power shortages continue to disrupt production and encourage enterprises to make costly investments in 'captive' power generation. It is also a major factor in increasing agricultural productivity and reducing the vulnerability of India's agriculture to fluctuations in rainfall. To meet the rapidly growing energy demand, the Government currently allocates almost one-third of its investment resources to the development of indigenous energy resources. In addition, it spends slightly more than 20% of foreign exchange earnings on imports of crude oil and oil products. 3. After successfully reducing its dependence on oil imports over the past decade, India faces again a widening gap between the demand for oil products and indigenous production. The widening gap results from several factors. First, despite pricing policies which kept oil-products prices well above border prices, demand continues to grow at more than 7% a year. Second, production from the Bombay High oilfield, which accounts for 70% of domestic oil production, has now reached a plateau; and third, in spite of large investments in oil and gas exploration, no major new oil or gas discoveries have been made during the past decade. 4. To reduce the growing deficit in oil products, the Government has three basic courses of action: First, it can, within narrow limits, increase production from existing oil fields, and step-up the pace at which already discovered oil fields are brought on stream; second, it can accelerate the development of indigenous energy resources, in particular natural gas, which can be used to meet part of the demand for oil products; third, it can import crude oil or oil products. The options for increasing indigenous energy production in the short and medium term are quite limited, and so are the options for substituting other fuels for oil products. This leaves India with the option of increasing its imports of crude oil and/or oil products. An increase in crude-oil imports would require costly investments in the expansion of refinery capacity. Although the Government has been actively seeking increased private sector involvement in the financing of new refinery capacity, the prospects of 'rnmparatively-low refining margins for oil products in international markets mU.,e it economically more attractive for India to rely, in the years ahead, increasingly on imports of oil products.  4e .9 -*,. 2 5. The growing demand for imported-oil products will require new investments in expanding the existing irnfrtstructure for the transport and distribution of these products within India. With congested conditions on most major rail atnd road routes, the Government has adopted a transport policy which gives priority to the expansion of the pipeline network. Experience with various transport modes has shown that, above certain minimum volumes, crude oil and oil products can be transported more efficiently through pipelir.s compared to rail and road transport. Pipelines eliminate the return movement of empty tankers and wagons, they provide for faster and more reliable delivery than any other mode of transport; they are also more energy efficient, and lower the risk of environmental pollution and product loss during transit. Construct'on of an oil-product pipeline thus provides the most efficient means of providing India's northwsestern region with the oil products it needs to meet its rapidly growing demand. 6. The Indian Oil Corporation (IOC) is India's largest refining and marketing company of oil products. IOC operates six refineries with a total refining capacity of about 21 million tons per year. IOC's extensive marketing facilities include a 3,850 km pipeline network, 15 LPG bottling plants, 150 products-storage and distribution terminals serving 13,500 service and retail outlets. Its share in the Indian oil products market is currently 58%. IOC, which is fully owned by the Government, is also India's largest commercial enterprise. It has an annual turnover exceeding Rs 140 billion, and employs more that 32,000 people. IOC's financial performance has been quite satisfactory, allowing IOC to fund the majority of its investments out of internally-generated funds. To meet the projected growth in the demand for refined products, IOC's management has adopted a strategy that is aimed at (a) increasing the import of oil products, (b) participating jointly with the private sector in the construction of new refineries, and (c) expanding IOC's pipeline and distribution system so it can handle a larger volume of crude oil and oil products. To meet these strategy objectives, IOC has decided on an investment program for FY90/94 which amounts to Rs 91.7 billion (equivalent to US$6.3 billion). 7. Rationale for Bank Involvement. The main objectives of the Bank's assistance in the energy sector are to support the Government in: (a) implementing an investment program that would provide a "balanced approach" (i.e. between refinery expansion and reliance on product imports), to meeting the country's oil needs, improving the efficiency of energy use, mobilizing additional resources from outside the public sector, and enhancing the managerial and operational efficiency of public sector energy enterprises; and (b) mobilizing external financing in the form of cofinancing, borrowing in international capital markets as well as through direct foreign investment. The proposed project fits well into this strategy. The pipeline, which will be financed under this project, gives the IOC increased flexibility in supplying the domestic market with oil products. It saves the cost of expanding domestic refining capacity, and permits IOC to take advantage of favorable conditions in international oil-product markets. The other components contribute to improving the overall efficiency of IOC's refinery operations, especially in critical operational areas such as modernization of instrumentation, process control optimization and computerization, areas in which the country has been relatively isolated from recent technological advances. IOC sought the Bank's assistance primarily as part of its efforts to improve its organizational and managerial efficiency, as well as to ease its access to international capital markets. Technical assistance during  3 project implementation will contribute to IOC's own efforts to become more efficient. With its investment needs expanding considerably during the Eighth Five Year Plan (1990 - 95), IOC will also need to mobilize considerable external financing. This loan from the Bank is intended to facilitate IOG's access to capital markets, suppliers' credits and other sources of external finance. In line with this objective, the Government agreed that the loan should be made directly to IOC. This would be the first time that a fully government-owned company in India has borrowed directly from the Bank. 8. Project Obiectives. The project is designed to support the Government's and IOC's prudent investment strategy of meeting future domestic demand for oil products, with greater flexibility and efficiency, thro".h: (a) reducing the cost of domestic transport of oil products; (b) providing IOC with the means to respond quickly to shifts in oil-product demand through imports, thus reducing costly and risky investme,Ics in new refinery capacity; and (c) strengthening IOC's capabilities in operating and maintaining its pipeline network and distribution facilities. The project would also assist IOC in its efforts to improve the overall efficiency of its existing refinery operations and to meet the Government's more stringent environmental standards in reducing the lead content of gasoline, which will come into effect in 1992. 9. Prolect DescriDtion. The proposed project will include (a) the construction of a 1,454 km oil-products pipeline from the Port of Kandla to Bhatinda; (b) the construction of a second Single Buoy Mooring System (SBM) at Salaya, which would reduce ship waiting time and provide the necessary capacity for imports of crude oil at the Koyali and Mathura refineries; (c) installation of catalytic reforming units at the Barauni and Digboi refineries, which will enable these refineries to reduce the lead content of the gasoline produced by them from 0.56 to 0.15 grams per liter as required by the Government's new guidelines; (d) installation of distributed digital control systems at the Guwahati, Barauni, Koyali, Haldia and Mathura refineries, which will improve the efficiency of the processing at these refineries, (e) installation of two gas turbines for power generation at the Digboi Refinery; (f) expansion of the lubrication oil manufacturing complex and installation of a sulphur plant at the Haldia Refinery; (g) implementation of an energy conservation and yield optimization program at the Guwahati, Barauni, Koyali, Haldia and Mathura Refineries, and (h) provision of technical assistance and training aimed at improving the operational and managerial efficiency of IOC's operations. 10. The total cost of the project is estimated at US$944 million equivalent, with a foreign exchange component of US$368 million (39.0%). Cofinancing of about US$75 million in exports and suppliers' credits will be sought to finance the acquisition of the pipes for the Kandla-Bhatinda pipeline. A breakdown of costs and the financing plan are shown in Schedule A. The proposed loan includes also a provision for up to US $20 million for retroactive financing. IOC would bear the foreign exchange and interest rate risks. Amounts and modalities of procurement and disbursements are shown in Schedule B. A timetable of key project-processing events and the status of Bank Group operations in India are provided in Schedules C and D, respectively. A map is attached. The Staff Appraisal Report, No. 7588-IN, dated March 31, 1989 is being distributed separately. 11. Agreed actions. Agreement has been reached with the Government and IOC on the following actions:  4 (a) the current refinery pricing and remuneration system will not be changed in a way that would adversely affect IOC's :inancial viability; (b) IOG will maintain: (i) a current ratio of not less than 1.2; (ii) a debt/equity ratio below 60:40; and, (iii) a debt service coverage of not less than 2.C (c) IOC will review annually its FY90-94 investment -rogram with the Bank and exchange views prior to the implementa on of any addit.on to the program that would result in an increase of over US$50 million in the funding requirements for any given year and, (d) IOC will arrange for US$75 millioa in co-financing for the purchase of line pipe. 12. Benefits. The pipeline offers substantial savings in transport costs compared to the next best alternative, rail transpcrt. The SBM will improve the security of supply of oil products to the northwest of India; other project components will improve refinery efficiency and have a beneficial environmental impact through energy conservation and reduced lead content in gasoline. As a result of the project, IOC will also gain access to modern petroleum industry technology and management practices, particularly in key operational areas such as computerization, process control and simulation, and production optimization. The economic rate of return for the main investment component, the Kandla-Bhatinda pipeline, is 22%; the economic rates of return for the other components are: 42% for the Distributed Digital Control System, and 29% for the Single Buoy Mooring System, 20% for the Catalytic Reformers, and 48% for the Haldia Lube Oil Block. The overall economic rate of return of the integrated project is 26%. 13. Risks. Possible risks include cost overruns, delays in project completion and a lower-thbn-projected demand for oil products in India. To minimize these risks, IOC has agreed to strengthen its project implementation team. Sensitivity analysis of the effect of different growth rates on the economic viability of the project have shown that a 25% reduction of the growth in the demand for oil products would lower the economic rate of return of the project for the principal project component, the Kandla-Bhatinda oil products pipeline, from 22% to 18%. The risk of a decline in the growth of demand for oil products is small. Demand projections carried out in the course of appraisal indicate that the Government's demand projections are conservative and that a considerable increase in the demand for oil products could be expected if the Government's plans to accelerate economic growth to 6% a year during the Eighth Five Year Plan materialize. Environmental risks are minimal, considering India's strict environmental standards with regard to pipeline and rt inery operations and IOC's excellent record of compliance with these standards.  5 14. Recq=ndati . I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Barber B. Conable President Attachments Washington D.C. April 6, 1989  Schedule A Prolect Co=t (US$ million) Local Forein Total Transoort Components Kandla-Bhatlnda P/L 269 179 448 Second SBM 5 7 12 Refinery Modernization Components Barauni Cat. Reformer 38 9 47 Digboi Cat. Reformer 15 3 18 Dist. Digital Control System 61 35 96 Digboi Captive Power Plant (Two 15 MW Gas Turbines) 2 16 18 Yield Optimization and Energy Conservation 20 14 34 Haldia Lube Block 10 6 16 Sulphur Plant 6 - 6 Techn. Assist. & Training 7 7 14 Base Cost 433 70i 79 Contingencies: Physical 43 28 71 Price l 64 Total Project lost \a 368 944 Interest During Conr -ruction: Bank loan - 46 46 Other loans 7 12 19 Total Financing Required 583 426 1,009 /j, Includes US$185.0 million in taxes and duties. Finaning Plan (US$ million) Local Forein Total IBRD 47 293 340 Export and Suppliers' Credits -- 75 75 IOC 58 594 Total Financing Required 583 426 1009  Schedule B Pasge of 2 PROCURET (US$ Million) ICB LCB Other /_ Total Kandla-Bhatinda P/L 325 8 263 596 (177) (1) (178) Second SBM 14 2 16 (12) - - (12) Reformers Barauni Reformer 48 - 13 61 (36) v (2) (38) Digboi Reformer 20 4 24 (16) (2) (18) Captive Power Plant 22 - 3 25 (10) - (1) (11) Distributed Digital Control System 128 - - 128 (45) - - (45) Energy Conservation and Yield Optimization 38 - 8 46 (15) - (2) (17) Haldia Refinery Lube Oil Block 18 - 4 22 (8) - (2) (10) sulphur Plant at Haldia Refinery 7 - 1 8 (1) (1) Technical Assistance and Training - 18 18 (10) (10) 620 10 314 944 Total (320) - (20; (340) /a Borrower's own procurement procedures; limited intenational bidding; and consulting and other services under Bank guidelines. NOTE: Figures in parentheses are the prospective amounts financed by the Bank loan. Estimated Disbursements (US$ Million) IBRD Fiscal Year FY90 FY91 FY92 FY93 FY93 Annual 35 110 130 50 15 Cumulative 35 145 275 325 340  Schedule B Page 2 of 2 Allocation of the Loan Category Amount Allocated Percent of Expend- (US$ million) itures to be financed 1. Equipment, materials, engineering and installation 295 a) directly imported 100% of foreign expenditures b) locally manufactured 100% of local expenditures (ex-factory) c) imported and procured locally 65% d) works 70% 2. Consultant Services 15 100% of foreign or and training local expenditures 3. Unallocated 30 Total 340  Schedule C Disbursements Timetable of Key Project Processing Events (a) Time taken to prepares About 15 - 18 months (b) Prepared by: Indian Oil Corporation Ltd. (c) First mission to c(.'sider the project: October 1987 td) Appraisal mission departures October 1988 (e) Negotiations: March 6 - 10, 1989 (f) Planned date of effectiveness: August 1, 1989 (g) List of Relevant PCRs and PPARs: None to date  PAGt; ? F S . STATS 0 S DA (As of Sept:_. 30. 1968 (Nat . Caaa itons) Loan oc FtJSoL iEstsillE. Year of Z Y / O b s hnml 63 Loas/ 3.334.2- 128 Czedtts fully disbwrsae- 8,329.4 963-I1 1980 inland tis.egt. 20.0 2.82 981-IN 1980 PopulatLon It 40.0 2.69 1003-tI 1980 TamtL Nadu utritIn - 32.0 3.59 1011-tI t980 Gujurat itwtaton It - 173.0 28.56 1027-IN 1980 Stw6auli Tham ut - 300.0 14.62 1034-IN t980 KainatUks SSZlaLatt - 54.0 5.71 1046-IN 1980 taj"tham Wat.: Suply & $wer . - 60.0 10.96 1053-IN 1980 *awakka r h . .