Philippines - Petroleum Exploration Promotion Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 8891 PROJECT COMPLETION REPORT PHILIPPINES PETROLEUM EXPLORATION PROMOTION PROJECT (LOAN 2201-PHL) JUNE 29, 1990 Industry and Energy Operations Division Country Department II Asia Regional Office document ha a rstictd diibution and may be used by only I the pefan ireefl their officra dutie Its contents may so oherwe be Bdio Wold bnk authokation.  ABBREVIATIONS AND ACRONYMS ADB - Asian Development Bank BED - Bureau of Energy Development NPC - National Power Corporation OKA - Office of Energy Affairs in the Office of the President of the Republic PNOC - Philippine National Oil Company PNOC-EC - PNOC Exploration Corporation PNOC-EDI - PNOC Energy Drilling Inc. RP - Republic of the Philippines UNDP - United National Development Program  THE W0U29ANK I NY Waston. D.4. 20433 U.SA. 0Mw. n tWet.G.wtu Opst.w' tlwift June 29, 1990 1EXORANDUM TO THE EXECUTIVZ DIRECTORS AND TBE PRESIDENT SUBJECT: Project Completion Report on Philippines Petroleum Ezploration Promotion Pro ect (Loan 2201-PHL) Attached, for information. is a copy of a report entitled Project Completion Report on Philippines Petroleum kxploration Promotion Project (Loan 2201-PHLP) prepared by the Asia Regional Office with Part II of the report contributed by the Borrower. No audit of this project has .been made by the Operations Evaluation Department at this time. Attachment Thisbdocument =haa dibutiundnmybeu d byc*olmatsonlyn do ps(WWW- of their officil du'eL Its contents may nototherwisebe d_in wklun Wo"EBank !cbrid  FOR OFFICIA S ONLY PHILIPPINES PETROLEUM EXPLORATION PROMOTION PROJECT (LN. 2201-PH) PROJECT COMPLETION REPORT TABLE OF CONTENTS Pate No. Preface ...................................................... 1 Evaluation Summary .......................... ii PART I PROJECT REVIEW PROM BANK'S PERSPECTIVE Project Identity .................................................. I Project Background ......................................... 1 Project Objectives and Description........................ 2 Project Design and Organization............................ 2 Project Implem.entation.......... 3 Major Results of the Project .................4 Project Sustainability..................................... 5. Bank Performance........................................... 5 Borrower's Performance..................................... 5 Project's Relaiosip ...................... 5 Performance of Contractors and Consultants......... 6 Project Documentation and Data.... ata..... 6 PART II PROJECT REVIEW FROK BORROWER'S PERSPECTIVE Borrower's Perspective of the Design and Implementation and its Development Impact on the Project*3... 7 PART III STATISTICAL INFORMATION Related Bank Loans............... .......................... 43 Project Timale........................ 44 Loan Disbursements......................................... 45 Project Implem2entation..................................... 46 Project Costs and Financing. ........... ....... 47 Pruject Results............... ............................. 49 Status of Loan Covenants ..................... 0...... 0. . .. 51 Use of Bank Resourceso...................................... 52 MAP IBRD 16361 * This part has been prepared by the Borrower and its contents and opinions are not attributable to the Bank. Thisdocument,haaresz"kteokdaiubudon and may be usedbyreipients nly in d pofonn"s of thir officia uties. tscontents maynot otherwiebedisclosedwithoit World Bank autohndaon.  PHILIPPINES PETROLEUM EXPLORATION PROMOTION PROJECT (Ln. 2201-PH) PROJECT COMPLETION REPORT PREFACE This is the Project Completion Report (PCR) for the Petroleum Exploration Promotion Project - BED component - in the Philippines, for which Loan 2201-PH in the amount of US$13.5 million was approved on September 30, 1982. The loan was closed on December 31, 1987, one year behind schedule. The loan amount, revised at government's request to $8.0 million, was fully disbursed and the last disbursement was in June, 1988. The PCR was jointly prepared by the Industry and Energy Operations Division of the Asia Regional Office (Preface, Evaluation Summary, Parts I and III), and the Borrower (Part II). * Preparation of this PCR was started during Bank's final supervision mission of the project in December, 1987, and is based, inter alia, on the President's Report (no separate Staff Appraisal Report was prepared); the Loan, Guarantee, * and Project Agreements; supervision reports; correspondence between the Bank and the Borrowers; and internal Bank memoranda.  - ii - PROJECT COMPLETION REPORT PHILIPPINES PETROLEUM EXPLORATION PROJECT (Ln. 2201-PH) EVALUATION SUMMARY Objectivess The Petroleum Exploration Promotion Projects (Loans 2201 and 2202- PH) were designed with a view to rekindling the interest of oil companies in exploration for oil and gas in the Philippines, and the extension of exploration activities to relatively unexplored offshore areas. Two borrowers were involved. the Republic of the Philippines for offshore areas and some unlicensed onshore areas and the Philippine National Oil Company (PNOC), which had control of most onshore areas. This report deals with the successiul exploration promotional effort carried out by the Bureau of Energy Development (BED) in the Ministry of Energy and the successor to BED, the Office of Energy Affairs (OEA) in the Office of the President. The strategy adopted for the project was to enhance the country's geological data base and to develop new exploration policy concepts through a nationwide basin evaluation exploration program. The results of the basin studies were to be contained in a promotional report which the Government would use in an active promotional campaign to revive international interest in petroleum exploration interest in the country. Implementation Experience: The project implemented consisted of the aeromagnetic survey of the offshore and onshore sedimentary basins over most of the Philippine archipelago except in the Sulu Sea and Palawan with 215,844 line km of data acquired, processed and interpreted; seismic survey over offshore areas not surveyed in the past with 9,104 line km profiled, processed and interpreted; regional basin evaluation studies carried out in 15 offshore and onshore basins, incorporating old and new data and a promotional package developed; and training to upgrade the technical capability of the Filipino staff involved in the project, to be completed through foreign training or short-term local courses in the Philippines. The project largely depended on foreign contractors and consultants for its technical execution. The need was to define precisely the job content of the contracts to be let and the terms of reference for consultants. Bank professional staff provided useful assistance in this work.  - iii - Results: Being an exploration promotion project, no economic or financial analysis of the project was made at appraisal. The project objective was, however, achieved in that five exploration contracts have been concluded and more will follow. Nine out of the 15 basins promoted apparently have been found attractive. The contracts typically provide for oil companies to carry out geophysical work, basically reprocessing of seismic data and interpretation, expending certain stated minimum amounts. Drilling options are thereafter available and after one or two wells are drilled, the next stage would lead to signing of service contracts for production and production sharing. Incentives for participation by Filipino partners with foreign oil companies are built into the service contracts. Sustainabilitys This type of project has a ripple effect and how far the ripple will spread is a function of the success of the promotion (which has been achieved) and ultimately of the companies" finding commercial hydrocarbons. The information gathered, however, establishes that there is a high probability of moderate hydrocarbon finds of a commercial nature. Findings and Lessons Learned: Fluctuations in oil prices during this period had created considerable uncertainty in the international oil industry and so the international promotional campaign was planned with care and deliberately delayed to the middle of 1987. The formulation of the terms for exploration were done taking into account the considered views of the Bank professionals to ensure a wide response. The fact that 43 promotional reports were sold, 14 companies applied for various areas and 5 exploration contracts signed as of 1989, is indicative of a successful, well planned campaign. The association of BED staff in the basin evaluation program carried out by the contractor's and consultants provided a great opportunity for local staff to hone their skills and turn into synergistic explorationists. OEA would, therefore, be well advised to address itself to the important question of the country benefitting technologically by associating both its own trained staff and that of PNOC, with the oil companies through the various stages of exploration, development and production activities. In particular, this is a unique opportunity for PNOC-EC, with its corps of trained geoscientists and drillers, to seek to participate with the oil companies when service contracts are signed and vigorous exploration by the foreign oil companies of offshore resources is pursued. Any risk investment which PNOC-EC has to make until the exploration wells establish commerciality of hydrocarbon finds is not likely to be large and in participating with several oil companies such risks are spread out.  THE PHILIPPINES PETROLEUM EXPLORATION PROMOTION PROJECT (LN 2201-PH) PROJECT COMPLETION REPORT PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE 1. Project Identity Name Petroleum Exploration Project Loan No. s 2201-PH RVP Unit t Asia Region Country : Philippines Sector Energy 2. Project Background 2.01 The Philippine energy situation is characterized by a heavy dependence on imported oil (58Z of total and 701 of conventional energy in 1987) and limited activity in exploration and development of indigenous resources. Proven oil reserves amount to only 4 million tons. Potential coal reserves amount to 1,500 million tons, but most of it is low grade and is expensive to mine. Hydro resources are substantial, with a potential of over 10,000 MW, but the sites (except for the few developed) are far from the grids and too costly to develop. Geothermal resources are abundant, a possible 8,000 MW, about 894 MW of which have been tapped and much more to be developed in the near term. With a view to assisting the Philippines to exploit its indigenous potential, the Bank extended four loans in FY82 and FY83, one for coal exploration, one for geothermal exploration and two for petroleum exploration promotion. A second Bank loan for a geothermal power project approved in FY88 includes provisions for appraisal and delineation of several geothermal fields. 2.02 The Petroleum Exploration Promotion Projects (Loans 2201 and 2202-PH) were designed with a view to rekindling the interest of oil companies in exploration for oil and gas in the Philippines, and the extension of exploration activities to relatively unexplored offshore areas. Two borrowers were involved, the Republic of the Philippines for offshore areas and some unlicensed onshore areas and the Philippine National Oil Company (PNOC), which had control of most onshore areas. This report deals with the successful exploration promotional effort carried out by the Bureau of Energy Development (BED) in the Ministry of Energy and the successor to BED, the Office of Energy Affairs (OEA) in the Office of the President.  2 2.03 The project under review had an overall cost of $9.5 million, about 412 less than the appraisal estimate of $16.0 million due to the lower than expected cost of the aeromagnetic and offshore seismic surveys, owing to the recession in the petroleum industry during the period. Disbursement of the Bank loan was consequently lower than envisioned, at $7.79 million against a loan amount of $13.5 million. This was foreseen early in the project, and the Government and Bank agreed to cancel $4.5 million of the loan amount in May 1984 and $1.0 million in June 1985. 3. Prolect Description and Objectives 3.01 The strategy adopted for the project was to enhance the country's geological data base and to develop new exploration policy concepts through a nationwide basin evaluation exploration program. The results of the basin studies were to be contained in a promocional report which the Government would use in an active promotional campaign to revive international interest in petroleum exploration interest in the country. The project was identified in the course of discussion with the Government in late 1981 and firmly defined by February 1982. The project as appraised consisted of the followings - Aeromagnetic survey of the offshore and onshore sedimentary basins over most of the Philippine archipelago except in the Sulu Sea and Palawan with 168,000 line km of data to be acquired, processed and interpreted; - Seismic survey over offshore areas not surveyed in the past with 8,400 line km to be profiled, processed and interpreted; - Regional basin evaluation studies to be carried out in 15 offshore and onshore basins, incorporating old and new data and a promotional package to be developed; and - Training to upgrade the technical capability of the Filipino staff involved in the project, to be completed through foreign training or short-term local courses. 4. Project Design and Organization 4.01 The project largely depended on foreign contractors a-id consultants for its technical execution. The need was to define precisely the job content of the contracts to be let and the terms of reference for consultants. BED's own geoscientists, assisted by Bank staff, performed this task effectively. Consultants also assisted in supervising the work of contractors, assistance which proved to be particularly useful. The project was well timed as advantage could be taken of the buyer's market prevailing at the time. The project *quantities, had to be increased slightly in the light of actual conditions during implementation. This was anticipated and not unusual in this kind of work.  3 5. Prolect Implementation 5.01 Aerm anetic surveys: Questor Surveys, Inc. of Canada was asked on December 3, 1982 to mobilize and the first survey line was flown on January 18, 1983. The acquisition was completed in April 1984, and the final contour and color maps were delivered to BED by end of September 1984. This was six months later than expected due to % 252 increase in coverage (to 215,844 kms) poor weather conditions caused by typhoons and storms, mechanical problems with the survey equipment and aircraft, and the crash of one of the two aircraft in April 1983 (which was replaced by another in June 1983). International Exploration Inc. of the United States (Intex) assisted BED in the planning of the aeromagnetic survey, supervision of data acquisition as well as data analysis. interpretation, and the preparation of reports. Intex prepared the last of the depth-to-magnetic basement maps during January 1985, at which time the project was about seven months behind schedule. 5.02 Offshore seismic survey: Seiscom Delta United International Corp. (SD) of United States commenced acquisition of seismic data on April 25, 1983. By September 14, 1983, 9104.35 line km of seismic profiles had been gathered over 15 offshore areas. Processing of 1,084 kms (a representative sampling of lines in each survey area) was done at Seiscom Delta's center in Australia in October 1983. The bulk of the remaining marine data was processed at PNOC's seismic data processing center, which began operating in May 1984, according to a priority schedule by area and by lines within each area. The offshore seismic coverage was augmented by 4,770 line km of infill seismic data gathered by the Petro-Canada International Assistance Corporation on a grant basis to the BED over selected offshore areas. Although processing was delayed by about six months to await establishment of the PNOC pt -ess center, this did not delay the exploration promotion which took place in S.- ;ember 1987. 5.03 Regional basin evaluation: Robertson Research - Flower Doery Buchan of Australia (RR) was selected as the consultant for the basin evaluation studies as well as for the supervision of the offshore seismic program. RR was in position by late-1982 in anticipation of the signing of the contract on May 19 1983 to provide 56 man-months of consultancy services until 1984. However, 21 additional man-months had to be added in 1985, 4 in 1986 and 3.5 in 1987 due to delayed implementation of some components, e.g., aeromagnetic data acquisition and setting up of PNOC seismic processing center. Also, in the course of implementation of the basin evaluation studies, the NW Palawan and Reed bank areas were subsequently included, on relinquishment by service contractors. RR committed three experts on a continuing basis and a number of specialists on short-term assignments; 18 geologists /geophysicists from BED worked closely with the RR personnel in a pool which catered to a synthesis of geology, geophysics, geochemistry, sedimentology, paleontology, micropaleontology, cartography, petrography, biostratigraphy, and seismostratigraphy. The result was a comprehensive geological analysis of 15 onshore and offshore sedimentary basins and sub-basins. The final product is contained in a comprehensive promotional report in 12 volumes of text and atlases. 5.04 Project promotion: This was the most critical phase of the project as the fluctuations in oil prices during this period created considerable uncertainty in the international oil industry. The promotional campaign was  4 planned with care and was deliberately delayed to the middle of 1987, when the international oil industry recommenced expressing interest in foreign exploration. The formulation of terms for exploration were done, taking into account the views of the Bank to ensure a wide response. First, an introduction to and a preview of the promotional presentation to take place in September 1987 was given in different foruims. The promotional presentation was then made at Manila, Houston, Calgary and London. Seventy companies attended the different presentations. As of November 1988, 43 report sets had been subscribed to and 14 companies had applied for/expressed interest in 14 exploration areas. Contracts had been signed or were about to be signed with five of these companies. Five others were under negotiation. 5.05 Training: BED engaged the International Human Resources Development Corporation (IHRDC) to run 10 courses of one-week duration each in Manila for the benefit of BED and PNOC technical staff. There was also a course on "Economic Evaluation of Petroleum Exploration and Development Projects" for senior staff members. The valuable association of BED staff in the basin evaluation program carried out by Robertson Research also provided a great opportunity for the former to hone their skills and turn into synergistic explorationist.:. Although several of the staff have since left BED, it appears that most of them are within the country working for PNOC or private oil companies. 5.06 The loan closing date was extended by one year to December 31, 1987 primarily to carry the project through .t>s logical cycle up to the presentation to the oil companies. 6. Maior Results of the Proiect 6.01 Being an exploration promotion project, no economic or financial analysi? of the project was made at appraisal. The project objective, however, has been fully achieved in that five exploration contracts are being concluded and more will follow. Nine out of the 15 basins promoted apparently have been found attractive. The contracts typically provide for oil companies to carry out geophysical work, basically reprocessing of seismic data and interpretation, expending certain stated minimum amounts. Drilling options are thereafter available and after one or two wells are drilled, the next stage would lead to signing of service contracts for production and production sharing. Incentives for participation by Filipino partners with foreign oil companies are built into the service contracts. These incentives allow 7.5Z of gross revenue to the oil companies so long as the Filipino participation is at least 302, with downward adjustments for lower participation. This is a laudable provision and it is to be hoped that the Filipino participation would result in technology transfer from the oil companies. 6.02 This is also a unique opportunity for PNOC-EC, with its corps of trained geoscientists and drillers, to seek to participate with the oil companies when service contracts are signed and vigorous exploration by the foreign oil companies of offshore resources is pursued. Any risk investment which PNOC-EC has to make until the exploration wells establish commerciality of hydrocarbon finds is not likely to be large and in participating with several oil companies such risks are spread out. Further, PNOC-EC should be in a position to offer  5 services to the oil companies, for example of its seismic processing center, and earn some income. OEA would be well advised to address itself, seeking the guidance of the Energy Coordination Council, to the important opportunity for the country to benefit technologically by associating with the oil companies through the various stages of their exploration, development and production activities. 7. Project Sustainability 7.01 This type of project has a ripple effect and how far the ripple will spread is a function of the success of the promotion (which has been achieved) and ultimately of the companies' finding commercial hydrocarbons. Probabilities can be worked out and intelligent guesses made of likely quantities and financial returns but this would be time consuming and still only a 'probability". The information gathered has established that there is a high probability of moderate hydrocarbon finds of a commercial nature. 8. Bank Performance 8.01 At project origin, the Bank advised BED to consider undertaking an aeromagnetic survey, followed by seismic surveys of the offshore on a selective basis. The project was des.gned, with BED and the Bank working together towards the objective of 4eveloping promotional packages to interest oil companies in exploration. This interaction was maintained throughout the project as the * promotional campaign was developed and implemented. Through eight supervision missions, the Bank assisted BED in overseeing the work of contractors and consultants and ensuring that problems were prevented or solved. Bank staff reviewed the draft promotion package and offered useful comments. The Bank also contributed to the formulation of the terms of the contracts to ensure wider industry participation. Apart from the financial assistance of the loan, the Bank made a substantial direct technical assistance. This project demonstrates that, more than through financial assistance, the Bank could play a significant role in opening up a country for exploration (of hydrocarbons in this case), if there is a judicious mix of technical input by Bank staff and inputs from consultants. 9. Borrower's Performance 9.01 BED/OEA displayed a strong commitment to the Project. At all stages f- a conception to completion, the uzge to succeed was noticeable. contractors/consultants and the Borrower's staff maintained cordial relationships and the cooperation was of mutual benefit. BEDIOEA has had competent managers who could use to good effect external financial and technical resources when necessary and available. 10. Project Relationship 10.01 Relationships among the various project participants - the Bank, BED and contractors/consultants, were extremely amicable, which helped to achieve smooth project implementation.  6 11. Contractors and Consultants' Performance 11.01 In general, all contractors and consultants performed well. In the aeromagnetic survAy, Questor's recordings were within the tolerance levels and diurnal variances. Line positions and flight elevations were well controlled. Intex, in controlling the quality of the survey, in interpreting the data and preparing the depth-to-magnetic-basement maps warranted a good rating. Seiscom Delta United retorded offshore seismic data with resolution which was optimal, indicating employment of an airgun source which was well tuned and stable. The data processed by them indicated the use of advanced software with flexibility. Seismograph Service Corporation, which assisted PNOC-EC to set up the seismic processing center and helped in processing an initial 3,000 line km of marine data, go' the center going efficiently after a few teething problems and provided quality. rhe inputs from Robertson Research, assisted by Flower Dorey Buchan, were coI -.cive to good results as evidenced by a thorough basin evaluation and presenta.ion to the industry. The satisfying common denominator in all of the consultants' work was that Filipino staff could participate fully in the activities and benefit by the association. 12. Project Documentation and Data 12.01 A staff appraisal report had not been prepared for the project, but the President's report was detailed enough on the technical descriptions. The legal documents were clear. The supervision reports and the progress reports from the Borrower have been exhaustive.  -7- THE PHILIPPINES PETROLEUM EXPLORATION PROMOTION PROJECT (LN 2201-PH) PROJECT COMPLETION REPORT PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE The Office of Energy Affairs in the Office of the President, Republic of the Philippines prepared Part II of the Project Completion Report of this project in June 1988.  L 8 - I. SUMMARY 1 II. HISTORICAL RETROSPECTIVE 2 A. Introduction 2 S. Project Background 3 C. Project Objectives and Description 4 !II. PROJECT IMPLEMENTATION 5 A. Achievement of Project Objectives 5 S. Project Management 11 C. Project Cost and Financing Plan 12 D. Procurement 12 i) List of Major Contracts 12 ii) Performance of Contractors 13 iii) Performance of Consultants 15 E. Disbursements 1l IV. INSTITUTIONAL PERFORMANCE 1l A. Performance in Complying with Covenants 16 S. Meeting Institutional Goals 17 V. FINANCIAL PERFORMANCE 17 VI. CONCLUSIONS 17  -9- A. AEROMAGNETIC SURVEY COVERAGE B. OFFSHORE SEISMIC SURVEY COVERAGE C. SEDIMENTARY BASINS OF THE PHILIPPINES D. LIST OF TRAINING COURSES E. PROMOTIONAL TEAM F. PRESENTATION AGENDA G. PARTICIPANTS TO THE PRESENTATIONS H. SUBSCRIBERS TO THE PROMOTIONAL REPORT I. LOAN PROCEEDS J. LIST OF MAJOR CONTRACTS K. OBLIGATIONS FROM LOAN PROCEEDS L. OBLIGATIONS FROM GOP COUNTERPART  -10- r . SlJlW:UHMARY' The Petroleum Exploration Promotion Project was 'oricei.vei a-. a rin;nc i a. an d tehni c a 1 ;it.in c to s!uppor tt h * elfort-z of the Government of the Philippines in its ir,4ie to d'eveiop indiqeno)u!-s energy resources andi att.ain zeir- zuffficiency in energy. The sttrategy adopted was to enhance the country'.: gaeological data base ant tievelop new exploration piay concepts through a nationwide bas-in evaluation program. The results of the basin studies ohall be containedi in a promotional report which the Government will use in an active promotional campaiqn to revive petroleum exploration interest in the country. The objectives of the Project were: (a) to rekindle petroleum exploration interest in the country and (b) to strengthen the technical capabiiities of the implementing agencies. The Project consisted of four components: (a) nationwide aeromagnetic survey, (b) offshore seismic survey (c; regional basin evaluation studies, and (d) training. Complementing the Project was a grant from Petro-Caanda international Assistance Corporation (PCIAC) which acquired and processed additional seismic lines in selected offshore areas. During the implementation of the Project it was agreed that the aeromagnetic survey be expanded to include other onshore areas. The basin evaluation studies also included areas which were recently relinquished by service contractors. Despite the additional coverage to some of the Pr3ject components, it became apparent that not all the loan funds of US$13.5 million would be required. In 1984 and 1985 the Government requested the cancellation of $4.5 million and $1.0 million, respectively. Thus, only US$8.0 million was uiltimately committed to finance the whole Project. The resuits of the Project are contained in 70 sets of a 12-volume report which consists of a project summary, .ix volumes of text and appendices, four atlas volumes and one suppiement. The report presents the conclusions and significant results of the basin evaluation program. New petroleum play concepts have been developed and old ones expaefed upon to provide the explorationist with a wide variety of untested or inadequately tested objectives. A promotional campaign was carried out in September 1987 in Manila, Houston, Calgary and London where - tw.o-tiay presentations were conducted before representatives of the oil industry. A complete set of the report was also displayed in these places for perusal of the presentation participants. As of Juine J1s8, 36 report sets have been sub-cribed to ana 7 companies have applied for 9 exploratinn area,--.  - 11 - rhe Project as a whoLe succeeded in making a natironwide evaluation of the petroleum potential of the country . s sedimentary basin, both onshore anid offshore. it also was an effective mechanism of training the Filipino technical staff involved in the Project. Applications for petroleum contracts have started to come in and it is anticipated that dirilling activities will increase i n the very near future. II. HISTiORICAL RETROSPECTIVE A_X JQtCodQ