Philippines - Petroleum Exploration Promotion Project

Docunent of The World Bank FOR OFFMCIAL USE ONLY RqeNtp N 8890 PROJECT COMPLETION REPORT PHILIPPINES PETROLEUM EXPLORATION PROMOTION PROJECT (LOAN 2202-PHL) JUNE 29, 1990 Industry and Energy Opzrations Division Country Department 1I Asia Regional Office Tlis document bas a mbestied disiuo and may be well by redlpienX only in the perfn of helr offkl dutes. Its conUtes may not odwe be discosed wf_tw Wodld Ban a_frissthn  ABBREVIATIONS AND ACRONYMS ADB - Asian Development Bank BED - Bureau of Energy Development NPC - National Power Corporation OEA - Office of Energy Affalrs in the Office of the President of the Republic PNOC - Philippine National Oil Company PNOC-EC - PNOC Exploration Corporation PNOC-ZDI - PNOC Energy Drilling Inc. RP - Republic of the Philippines UNDP - United National Development Program  THE WORLU SANKFOR OFFMCAL USE ONLY TIff WOETU BANK Wasntton. 0.r. 2033 USA. Ok. oi OMbv.Cmwai June 29, 1990 HENORhUMnK TO TSE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECTs Project Completion Report on Philippines Petroleum Exploration Promotion Pro1ect (Loan 2202-PEL) Attached, for infoiuation, is a copy of a report entitled 'Project Completion Report on Phillippines Petroleum Exploration Promotion Project (Loan 2202-PHL) prepared by the Asia RegiROal Office with Part TI of the report contributed by the Borrower. No audit of this project has been made by the Operations Evaluation Department at this time. Attachment This document has a mt ed diakdbudona od may be wed by =ci*ios onl in lth ofb thdt ofl dut. Its conteots may not oUWWiss be discled wtbout Wodd Seek wsd _,uo.  FOR OMCIAL USE ONLY PHILIPPINES PETROLEUS EXPLORATION PROMOTION PROJECT (Ln. 2202-PH1 PROJECT COMPLETION REPORT Table of Contents Paae No. Preface .....................................*....*....... . i Evaluation Summary .............................................. ii PART I PROJECT REVIEW FROM BANK'S PERSPECTIVE Project Identity .................................... 1 Background ......... ................................... 1 Project Objectives and Description .................. 2 Project Design and Organization ..................... 3 Project Implementation ..... . ... . . . . . . . . . . . ... .....- - 3 Major Results of the Project ......................... S Project Sustainability .............................. . 5 Bank Perfornance .................................... 5 Borzower's Performance ............................ . 6 Project Relationships .............................. . 7 Performance of Contractors and Consultants .......... 7 Project Documentation and Data ................... ........ 7 PART II PROJECT REVIEW FROM BORROWER'S PERSPECTIVE Borrower's Perspective of the design and Implement- ation and its Development Impact on the Project*.... 8 PART Ii STATISTICAL INFORMATION Related Bank Loans ........................ ........ 37 Project Timetable .................................. 38 Loan Disbursements .................................. 39 Project Implementation ................... .... . .... 40 Project Costs and Financing ......................... 41 Project Results .................. ........... .. 43 Status of Loan Covenants ............................ 45 Use of Bank Resources ............................... 46 MAP IBRD 16360 Note: *This part has been prepared by the Borrcwer and its contents and opinions are not attributable to the Bank. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents nay not otherwise be disclosed without World Bank authorization.  - i - PHILIPPINES PETROLEUM EXPLORATION PROMOTION PROJECT (Ln. 2202-PH) PROJECT COMPLETION REPORT PREFACE This is the Project Completion Report (PCR) for the Petroleum Exploration Promotion Project in Philippines, for which Loan 2202-PH in the amount of US$ 24 million was approved on September 30, 1982. The loan was closed on December 31, 1988, two years behind schedule. The loan amount was reduced to US$ 7.3 million at Government's request, and was fully disbursed, with the last disbursement in June, 1989. The PCR was jointly prepared by the industry and Energy Operations Division, Country Department II, Asia Regional Office (Preface, Evaluation Summary, Parts I and III), and the Borrower (Part rI). Preparation of this PCR was started during the Bank's final supervision mission of the project in December, 1988, and is based, inter alia, on the President's Report (there was no separate Staff Appraisal Report); the Loan, Guarantee, and Project Agreementa; supervision reports; correspondence between the Bank and the Borrower; and internal Bank memoranda.  ii - PROJECT COMPLETION REPORT PHILIPPINES PETROLEUM EXPLORATION PROJECT (Ln. 2202-PH) EVALUATION SUMIRY Objectives: The Petroleum Exploration Promotion Projects (Loans 2201 and 2202-PH) were designed with the objective of rekindling private oil company interest in oil and gas exploration. The objective was to acquire and update geological, aeromagnetic and geophysical data, integrate all information into analytical studies of the prospective basins and prepare promotion packages. The program in the three areas of Mindoro, Cebu and Cotabato provided for acquisition and processing of 4000 line Kms of seismic profiles and the drilling of five exploratory wells. The project included additionally 400 line Kms of seismic data from North Luzon for reprocessing as well as drilling of a sixth well as could be needed. A parallel objective was to strengthen the exploration capacity and technical capabilities of PNOC-EC and to train the staff, including, inter-alia, specialized courses in geophysics, production geology, reservoir engineering and logging services. Implementation Experience: The PNOC/PNOC-EC project under review had an overall cost of $ 54.0 million of which the Bank loan was to cover $24.0 million. Due to the economic difficulties that the Philippines encountered in 1984 and later, RP decided to severely restrict the exploration activities of PNOC. In consequence, PNOC/PNOC-EC decided, first, to limit activities to a lesser number of areas and second, stop short of drilling any wells in the selected areas, particularly as it appeared that the absence of well data did not affect the promotion prospects. The project as ultimately executed, cost $19.9 million with the borrowing from the Bank amounting to $7.3 million. PNOC-EC carried out with its own staff geological surface mapping, collection of rock samples and similar field work in respect of geology. For seismic field survey, it engaged two US companies, Geophysical Services Inc., (GSI) and Seiscom Delta United (SD). Ten short courses run by an international consulting company in Philippines and on job training provided by the several contracting companies assisted in building up the technical skills of all of the PNOC-EC personnel as well as of the BED personnel.  - iii - Results: The objective of the project was to take exploration in three onshore areas to a stage where meaningful data could be packaged into a synthesized presentation for the benefit of the oil companies. Of two basins promoted by PNOC-NC for further exploration by oil companies, in one area, a consortium has contracted to drill three wells. If there is a commercial discovery, a production contract providing for sharing of hydrocarbons will be signed. Oil company interest in the second area, while not absent, has not been enthusiastic. The Project had envisaged promotion of a third basin also, but PNOC-EC had not carried out the survey program designed for this area, affected by the economic crisis of 1984-86, and hence it was not promoted. Sustainabilitv: The economic benefits of the project will depend upon the success of the exploration effort undertaken by the various oil companies Findings and Lessons Learned: The Bank fulfilled its obligations to advise on, monitor and review the progress by well timed supervision missions and comments on the periodic reports received in the Bank. Of particular importance was the overseeinq of the work of the contractors and the advice given, from time to time. Bank staff also prepared an assessment of the geological prospects of each area using RASP computer package and estimated possible oil recovery and the economics. In the final phase of Promotion, Bank staff reviewed the packages and gave extensive comments on the legal, technical and commercial aspects, all of which contributed to the success of the promotion. PNOC-EC and PNOC were deeply appreciative of the Bank's involvement and guidance. The Borrower's performance was affected by the political and economic changes of the period. RP had evolved a firm policy for promoting exploration in 1981/1982, but the economic crisis from 1984 led to major institutional changes in the energy sector and to the scaling down of the exploration program. Although institutional stability has since been achieved, not all long term policies appear to have been reviewed or carefully assessed. In particular, the future role of PNOC-NC in exploration and the policy to be pursued to promote exploration by oil companies in areas where such work remains to be completed have to be considered.  THE PHILIPPINES PETROLEUM EXPLORATION PROMOTION PROJECT (LN 2202-PH) PROJECT C0MPLETION REPORT PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE 1. Project Identity Name Petroleum Exploration Promotion Project Loan No. : 2202-PH RVP Unit : Asia Region Country s Philippines Sector s Energy 2. Backaround 2.01 The Philippines are heavily dependent on imported oil (58% of total and 70% of conventional energy in 1987). Proven oil resources amount only to 35 million barrels. Potential coal reserves are about 1500 million tons, but most of it is low grade and expensive to mine. Hydro resources are vast, with a potential of over 10,000 MW, but the sites except for the few already developed are far from the grid and too costly to develop. Geothermal resources are abundant with an estimated potential of 8000 Ml about 894 KW of which have been harnessed and efforts are under way to accelerate development in this subsector. With a view to strengthening the indigenous availability of energy resources, the Bank extended four loons 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 FY 88, included appraisal and delineation of new geothermal fields among the project components. 2.02 The Petroleum Exploration Promotion Projects (Loans 2201 and 2202-PH) were designed with the objective of rekindling private oil company interest in oil and gas exploration. Between 10 and 30 years earlier oil companies had explored and relinquished areas in the Philippines when technology was less advanced, the oil prices were low and the offshore element was unfamiliar. The need, therefore, was to acquire and update geological, aeromagnetic and geophysical data, integrate all information into analytical studies of the prospective basins and prepare promotion packages. The Republic of Philippines (RP), through the then Bureau of Energy Development (BED), was concerned with all offshore areas and a few unlicensed onshore areas while the Philippine National Oil Company (PNOC), together with its subsidiary the Exploration Corporation (PNOC-EC), was  2 concerned with most other onshore areas. Loan 2201-PH was availed of by RP and Loan 2202-PH by PNOC so as to facilitate the promotion of exploration in their respective areas. This report deals with the completion of the project undertaken by PNOC/PNOC-EC. 2.03 The PNOC/PNOC-EC project under review had an overall cost of $ 54.0 million of which the Bank loan was to cover $24.0 million. Due to the economic difficulties that the Philippines encountered in 1984 and later, RP decided to severely restrict the exploration activities of PNOC. In consequence, PNOC/PNOC-EC decided first to limit activities to a lesser number of areas and second, stop short of drilling any wells in the selected areas, particularly if it appeared that the absence of well data did not affect the promotion prospects. The project, as ultimately executed, cost $19.9 million with the borrowing from the Bank amounting to $7.3 million. Of two basins promoted by PNOC-EC for further exploration by oil companies, one has attracted attention so far. In this area, a consortium has contracted to drill three wells. If there is a commercial discovery, a production contract providing for sharing of hydrocarbons will be signed. Oil company interest in the second area, while not absent, has not been enthusiastic. The Project had also envisaged promotion of a third basin, but PNOC-EC had not carried out the survey program designed for this area, affected by the economic crisis of 1984-86, and it wan, therefore, not promoted prior to loan completion. 3. Project Obiectives and Description 3.01 The PNOC/PNOC-EC component of the project was devised so as to support over 80% of the company's exploration program during 1982-85. The three onshore areas of immediate interest were Xindoro, Cebu anid Cotabato (Mindanao). The sub components of the program were as follows. Mindoro: (West) Continue geological field work, collect source rocks, follow up on the reconnaissance survey which covered 354 line Kms until July 1982 with detailed profile of about 400 line Kms, and culminate in drilling a well in 1984, if warranted. An oil company had drilled a well with gas show in Southern Nlindoro in 1982 before relinquishing the area. Nindoros (East) Continue geological field work, collect reservoir and source rock samples, acquire 800 line Km. of reconnaissance and detailed seismic profile, and culminate in drilling one well in mid 1984, if indicated. Cebu: In this area where oil companies had in the past established production of 2500 barrels of light oil per day, carry out extensive geological surveys, map surface geological structures: conduct gravity surveys, progress to  3 the lay out of a seismic grid, do 600 line Kms of reconnaissance and detailed seismic work, and culminate in one well in mid 1985. Cotabatos Oil companies had drilled 6 wells in the late 50o and early 60s, encountering gas shows and leaving poor records behind. Carry out fresh geological surveys, collect source rocks, conduct gravity operations, acquire 2200 Kms of seismic lines and aim to drill two wells in 1985. 3.02 The program in the three areas of Mindoro, Cebu and Cotabato provided for acquisition and processing of 4000 line Kms of seismic profiles and the drilling of five exploratory wells. The project included additionally 400 line Kms of seismic data from North Luzon for reprocessing as well as drilling of a sixth well as could be needed. 3.03 A parallel objective was to strengthen the exploration capacity and technical capabilities of PNOC-EC and to train the staff, including, inter-alia, specialized courses in geophysics, production geology, reservoir engineering and logging services. 3.04 The project was to be completed ti June 30, 1986. 4. Proiect Desian and oraanization 4.01 The ?roject largely depended on foreign contractors and consultants for its technical execution. The job descriptions for the surve-ys and processing of data had to be drawn precisely and PNOC-4C had competent staff to do so and to manage implementation. Bank staff fully extended their cooperation in scrutiny of specifications and overseeing of execution. This was a relatively simple project to design and carry out, although there were logistic difficulties due to remoteness and ruggedness of terrain in some sectors which were surveyed. 5. Pro1ect Implementation 5.01 Taking into account the in-house capabilities of PNOC- EC, the Project required the engagement of a structural geology consulting company, two seismic companies for field survey (seismic instruments and 6 to 10 specialists) and a data processing company for processing. A tentative exploration program for 1982-85 was agreed between the Bank and PNOC-EC during appraisal and it was required to be updated annually in consultation with the Bank. 5.02 FN3C-EC carried out with its own staff geological surface mapping, collection of rock samples and similar field work in respect of geology. For seismic field survey, it engaged two US companies, Geophysical Services Inc., (GSI) and Seiscom Delta United (SD). The GSI crew worked from August 15, 1982 to August 15, 1984 in East and West Mindoro, profiled 1278 line Rms,  4 averaging 65.2 Kms/month in East Mindoro and 44.8 Rms in West Mindoro. The appraisal estimate was 60 Kms/month for Mindoro; the lower achievement in West Mindoro was due to difficilty of acceas in the mountainous terrain. The SD crew worked from February 1983 to March 1985 first in Mindoro (Calintaan), an area in the south-west which became available after an immediately preceding relinquishment by an oil company; then, in Cebu and then back to Mindoro. It acquired 1062 line Kms, of which 604 were in Cebu, averaging 45 Kmi/month in all, compared to the appraisal estimate of 60 Kms/month for Mindoro and 40 ims/month for Cebu. In the third area, Cotabato in Mindanac, no seismic work was undertaken, primarily due to the economic crisis the Philippines faced from late 1984 and cunsequent budget constraints in 1985. It will be seen that in Mindoro and Cebut, the seismic coverage was more extensive than planned at appraisal, 2340 Kms against 1800 line Rms, involving, therefore, a longer time for acquisition. A major modification to the exploration program for Mindoro became necessary as aeromagnetic and new gq.ogical and preliminary seismic data came in. 5.03 For processing of seismic data, two measures we--e taken. First, PNOC-EC hired Digicon of Singapore to process the data to be acquired by the two foreign seismic field crews. Second, subsequent to the appraisal, it decided on establishing an in-house processing center. Computer hardware and software as needed were purchased using proceeds of three Bank loans, this Loan 2202-PH, the complementary loan to BED (2201-PH) and the loan for Geothermal Exploration to PNOC (2203-PH). The processing center would serve the needs for processing under the three loans. Bank gave its approval to the proposal and utilization of part of the allocation for seismic and other surveys in the loans to the installation of the processing center. The system proposed by Seismograph Service Corporation of USA (SSC) was evaluated as the most suitable. The company undertook to deliver, install and operate initially a VAX 11/780 computer. The center began operations in May 1984. With the establishment of the processing center, the processing by Digicon at Singapore was limited to 1255 Ims. The processing center processed the land data under the project not assigned to Digicon. 5.04 As early as May 1984, the geological prospects on Mindoro appeared very encouraging. Several plays had been identified and locations for three wells were possible of being released. In Cebu, seismic penetration presented problems, but on several lines deep events could be recognized. It was hence anticipated that PNOC-EC could attract partners to drill the exploratory wells. In conjunction with BED, PNOC-EC also engaged Robertson Research of Australia in developing a promotion package which would include the impressive prospect inventory on onland Mindoro and Cebu. The promotion, it seemed could be targeted for mid 1985 and if the response to PNOC-SC areas was poor, there still  5 would be time for PNOC-EC to drill the wells before loan closing. In the event, the promotion did not take place until September 1987 and negotiations with oil companies had been in progress when the Bank loan closed on December 31, 1988 after two one year extensions. Ns exploratory wells were drilled under the project. 5.05 The training part of the project was successfully carried out. Ton short courses run by an international consulting company in Philippines and on job training provided by the several contracting companies assisted in building up the technical skills of all of the PNOC-EC personnel as well as of the BED.personnel. 5.06 Environmental Impact and Safety: The land seismic parties used dynamite, but the charges were too small to cause concern. Safety ru'es as p&zscribed were enforced. No wells were drilled and the question of disposal of fluids and borehole cuttings did not arise. 6. Major Results of the Proiect 6.01 The objective of the project was to take exploration in three onshore areaa to a stage where meaningful data could be packaged into a synthesized presentation for the benefit of the oil companies. This was actually done in two areas and oil company interest was evinced in abundant measure, although for the present concrete results involving commitment to drill wells have followed in one area only. The promotion in respect of the offshore areas under the complementary Loan 2201-PH had led to greater response from the oil companies as explained in the Project Completion Report pertaining to that loan. The two loans however for all intents and purposes had one objective and were processed together and so must be assessed together in the results. Several oil companies have now contracted to carry out detailed geophysical surveys-offshore and onshore-and in some instances also drill obligatory wells. 7. Prolect Sustainability 7.01 The economic benefits of the project will depend upon the success of the exploration effort undertaken by the various oil companies. 8. Bank's Performance 8.01 The initial involvement of the Bank was in reviewing the program of PNOC-EC for exploration during 1982-85. The program was reformulated to concentrate on three promising areas and to further prepare the areas for possible revival of oil company interest and making of further investments in exploration, development and production. The Project Agreement with PNOC-EC not only provided for an annual update of the exploration program  6 in consultation with the Bank, but also required such consultation prtor to PNOC-EC proceeding with detailed seismic or exploratory drilling in any given area covered by the project. At those stages there was to be an assessment as to the following: - whether the geological, geophysical, and topographical ::tta warranted the pursuit of further exploration in ae particular area; - whether the exploration should then be carried out by a joint venture; and - whether PNOC-EC's share of expenditure in a joint venture, if any, should be financed under the loan. 8.02 The Bank fulfilled its obligations to advise on, monitor and review the progress by well timed supervision missions and comments on the periodic reports received in the Bank. Of particular importance was the overseeing of the work of the contractors and the advice given, for example, use of heavier charges and patterns to obtain deeper seismic reflections in one area and replacing of a land analyst in seismic processing. From time to time Bank staff prepared an assessment of the geological prospects of each area using RASP computer package and estimated possible oil recovery and the economics. In the final phase of Promotion, Bank staff reviewed the packages and gave extensive comments on the legal, technical and commercial aspects. At all times, a senior geologist and a senior geophysicist remained dedicated to the exploration work in progress under PNOC-EC's control, apart from other assistance extended. The satisfying feature was that PNOC-EC and PNOC were deeply appreciative of the Bank's involvement and guidance. 9. Borrower's Performance 9.01 The Borrower's performance was affected by the political and economic changes of the period. RP had evolved a firm policy for promoting exploration in 1981/1982, but the economic crisis from 1984 led to the scaling down of the exploration program. The new Government which came into power in February 1986 abolished the Ministry of Energy. The PNOC Board was reconstituted. The institutional upheavals initially led to a hiatus in long term policy and resulted in a suspension of the exploration program in so far as commitments had not been made. As mentioned earlier the Bank project suffered a truncation. Although institutional stability has since been achieved, not all long term policies appear to have been reviewed or carefully assessed. In particular, the future role of PNOC-EC in exploration and the policy to be pursued to promote exploration by oil companies in areas where such work remains to be completed have to be considered. Specifically, Cotabato (Mindanao) which  7 was a project area, but was not taken up for seismic survey continues to remain an attractive prospect. Bank geoscientists evaluated, on the basis of recent geological work, the Agusan-Davao area in Mindanao as offering good oil prospects and by analogy, the Cotabato area as showing increased prospectiveness. Among other areas North Cebu and Leyte, where rich Lower MLocene rocks have been identified in the recent past, are also clearly upgraded. In the Completion report on Loan 2201-PU, it was suggested that PNOC-EC should seek to farm-in with oil companies which were entering into offshore geophysical survey contracts and shortly could convert these to service contracts for production, both with a view to expanding its technological know-how and deploying its technical manpower and services to earn income. It appears that PNOC-EC has in fact been on the look out for possible farm-in but not much encouragement has been forthcoming from the oil companies. 10. Project Relationship 10.01 All inter relationships, as between the Bank and the Borrower, the Borrower and the contractors and consultants, the Bank and the contractors and consultants were satisfactory and conducive to the efficient conduct of work. 11. Performance of Contractors and Consultants 11.01 The major contractors were the two seismic survey ompanies, the seismic data processing company and the contractor who set up the seismic processinq center. All performed efficiently and committed competent personnel to the work. There were minor problems such as unsuitable equipment or one or other of the personnel not being sufficiently qualified, but on PROC-EC asking for changes, with Bank's support, the changes were made. The most satisfactory feature was that all contractors associated PNOC-EC staff in their work and helped to transfer know-how. The individual consultants and providers of third party services were carefully chosen and gave a good account. 12. Prolect Documentation and Data 12.01 A staff appraisal report was not prepared for the project, but the President's report was comprehensive including technical details. The legal documents were clear. The supervision reports and the progress reports from the Borrower were exhaustive.  -8- THE PHILIPPINES GEOTHERMAL EXPLORATION PROJECT (LN 2202-PH) PROJECT COMPLETION REPORT PART Ils PROJECT REVIEW FROM BORROWER'S PERSPECTIVE The Office of Energy Affairs in the Office of the President, Republic of the Philippines p?epared Part II of the Project Completion Report of this project in June 1988.  * 9- PART 11 This report was prepared by the Phillipps National Oil Corporation - Energy Developent Corporation, the Borrower. I. SUMMARY The Petroleum Exploration Promotion Project was envisioned primarily to stimulate petroleum exploration in the Philippines. The PNOC EC component of the project focused on three onshore areas: Mindoro, Cebu and Cotabato. Geological and geophysical surveys were to be conducted; drilling of wells, if warranted. PNOC EC would eventually invite fc-eign or domestic oil companies to form joint ventures that would pursue a more intensive exploration. Total cost of the PNOC EC component of the project was estimated at USS53 million. Of the US$26 million foreign component of the total cost, US$24 million was to be financed by the World Bank. A secondary objective of the project was to strengthen the exploration capacity and technical capability of PNOC EC. By late 1984 it became evident that the original scope of the Project would be truncated. Due to economic reasons, it was decided to cancel US$8.3 million in 1985; later cancellations trimmed the original loan of US$24 million to US$8.4 million. The exploration program in Cotabato was not fully implemented and no wells were drilled under the project. Instead, the other two areas, Mindoro and Southern Cebu, were actively promoted. A synthesis of the technical data on these two basins were collated into data packages which were provided to interested parties. In 1988 PMOC EC entered into a joint venture agreement with a consortium of local and foreign companies to drill at least two wells in Southern Cebu in 1989. For f4indoro promotion of the area is ongoing. Several companies seem interested in Mindoro but PNOC EC has yet to receive a firm offer. II. PROJECT BACKGROUND the Philippine government, keenly aware of the increasing energy requirements of the country and the economic repercussions of having to import oil - the prime energy resource - had adopted a national policy of self-reliance in energy during the mid-1970's. To achieve this goal, one of the prescribed courses of action was to boost petroleum exploration -. in the country.  - 10 - 2202-PH Petroleum Exploration Promotion Project Completion Report PNOC Exploration Corporation One of the latest moves towards this end was the launching of the Philippine Petroleum Exploration Project in 1982, through the then Bureau of Energy Development (BEO) under the Ministry of Energy and the Philippine National Oil Company (PNOC) through its exploration arm, PN4OC Exploration Corporation (PNOC EC). Financial assistance was obtained from the World Bank under a Loan Agreement formally signed on October 28, 1982. The Loan Agreement had two components: the BED component, Loan 2201 PH and the PNOC EC component, Loan 2202 PH. This report deals mainly with the PNOC CC component of the Project. A separate completion report covering the BED component was prepared by the Office of Energy Affairs COEA). {II. PROJECT DESCRIPTION AND OBJECTIVES The PNOC EC component of the World Bank Loan Agreement was devised to finance the foreign exchange cost of 80% of the company's exploration activities from 1982 to 1985. The other activities were either funded solely by PHOC EC or conducted in cooperation with Chinese Petroleum Corporation. The World Bank - assisted exploration program concentrated on three onshore greas of iinmediate interest: Mindoro, South Cebu and Cotabato in Mindanao (Annex A). These areas lacked extensive exploration although existing geological knowledge was favorable and chances of small accumulations of oil and gas appeared good. Assistance to PNOC under the Project Agreement was desiVned to support exploration up to the stage that oil companies interest would be rekindled and would eventually lead to joint ventures. A step-by-step work program was prepared accordingly. The components of the program were as follows: A.1 Mindoro (West) 1. Continue geological field work; collect reservoir and source rock samples 2. Follow up on the available reconnaissance seismic survey (which covered 354 line kilometers until July 1982) with detailed profiles of about 400 line kilometers 3. Subsequently drill a well in 1984, if warranted. An oil company drilled a well with gas show in Southern Ilindoro in 1982, before relinquishing the lease on the area.  2202-PH Petroleum Exploration Promoti on Project Completion Report PNOC Exploration Corporation A.2 Mindoro (East) 1. Continue geological field work; collect reservoir and source rock samples 2. Acquire 800 line kilometers of reconnaissance and detailed seismic profile 3. Drill one well in mid 1984, if warranted. S. South Cebu 1. Carry out extensive geological surveys; map surface geological structures 2. Conduct gravity surveys, and proceed to the lay out of a seismic grid 3. Acquire 600 line kilometers of reconnaissance and detailed seismic work 4. Drill one well in mid 1985, if warranted. Other oil companies that previously worked in the area had established production of 250 barrels of light oil per day. C. Cotabato 1. Carry out fresh geological surveys; collect source and reservoir rock samples 2. Conduct gravity operations 3. Acquire 2,200 kilometers of seismic data 4. Aim to drill two wells in 1985. Other oil companies have drilled 6 wells with las shows in the late 1950's and early 1960 s. However, previous exploration data are either poor, incomplete or missing. In summary, the above work program called for the following activities: A. Geological surveys in Mindoro, Cebu and Cotabato B. Gravity surveys in Cebu and Cotabato C. Acquisition and processing of 4,000 kilometers of seismic data from the three areas 0. Orilling a total of five exploratory wells in three areas  - 12 - 2202-PH Petroleum Exploration Promotion Project Completion Report PNOC Exploration Corporation The Project also allowed for the reprocessing of 400 line kilometers of seismic data from North Luzon, as well as drilling of a sixth well, if needed. A parallel objective was to strengthen the exploration capacity and technical capabilities of PNOC EC by training its technical staff, to p.rovide specialized courses in geophysics, production geology, reservoir engineering and logging services. The Project was to be completed by June 30, 1986. IV. IMPLEMENTATION AND RESUUTS A tentative exploration program for the period 1982-1985 was drawn by the Bank and PNOC-EC during the initial Proj-ect appraisal. It was agreed that the program would be update; annually in consultation with the Bank. As early as 1984, however, it became evident that the scope of the Project would be truncated. Primarily due to the economic crisis faced by the Philippine government and a consequent budgetary constraint, the seismic program in Cotabato was cancelled. Furthermore, instead of drilling exploratory wells on its own, PNOC decided to actively promote Mindoro and Cebu and attract partners to participate in the drilling operations. The Project completion date was also moved from June 1986 to December 1988. The geological and gravity surveys were carried out by the PUOC EC staff. The implementation of the rest of the Project required the following major activities: A. Contracting two seismic crews for data acquisition B. Cont"acting a seismic data processing company C. Purchasing a seismic data processing system (software and hardware) D. Hiring of structural geology consultants E. Hiring of third-party services for geochemical and reservoir analysis and for promotional campaign assistance. A discussion of the Project Implementation follows:  - 13 - Geological Surveys The PNOC-EC stepped-up exploration work in Mindoro following the loan approval. A semi detailed work that includes stratigraphic, sedimentologic and structural studies, was conducted in the area. This was supplemented by laboratory studies done by Robertson Research in Singapore to confirm the reservoir and source potential of tne sediments in the basin. In 1982, PNOC EC conducted the reevaluation of the oil potential of Southern Cebu. The studies which include field stratigraphic, sedimentologic, structural geology and laboratcry analysis of potential source and reservoir works, were geared towards identifying new plays which may prove to be the key to a commercial discovery in the area. Structural geology consultants from International Exploration Corp. (INTEX) helped unravel the complex geology of Mindoro and Cebu. A reconnaissance and semi-detailed geologic study was, conducted in Cotabato starting 1982. Potential areas were identified/prioritized and recommended for a more detailed study. All field operations were suspended in 1985 because of the economic crisis faced by the government at the time. Gravity Surveys Gravity surveys were conducted by PNOC EC personnel in Cebu and Cotabato. From July 1982 to February 1983 the gravity crew covered 1,129 square kilometers in Cebu. The Cotabato gravity survey was undertaken early in 1982 (Southern Cotabato) and in 1983 (Northern Cotabato), with both surveys covering a total of 3,375 square kilometers. Along with other geological input, the gravity survey results in both areas were used during the preparation of the seismic programs. Seismic Surveys Two U.S.-based companies, Geophysical Services, Inc. (3SI) and Seiscom Delta United (SOu), were contracted to provide the seismic instruments and the basic party personnel. The logistical support was provided by PNOC EC. The rugged terrain of Mindoro and Cebu, and the remoteness of some line locations posed a logistical challenge. At times, as many as 750 to 900 men, from a minimum crew of 400 men were required to perform the conventional survey, chaining, drilling and recording jobs, and to do such tasks as cutting trails, supplying water to the drilling crew from a river 1-2 kilometers away, and moving camps. The GSI crew worked from August 1982 to August 1984 in  - 14 - 2202-PH Petroleum Exploration Promotion Project Completion Report PNOC Exploration Corporation East and Southwest Miffdoro. A total of 1,278 line kilometers was profiled by GSI, averaging about 68 kilometers per month in East Mindoro and 39 kilometers per month in Southwest Mindoro. The appraisal estimate was 80 kilometers per month in East Mindoro and 40 kilometers per month in West Mindoro or an average production of 60 kilometers per month in Mindoro. The lower actual production rates were attributed to drilling and accessibility problems. It was noted that utilization of the Canadian Canterra CT-155 rigs improved the drilling production rate in Minooro. The SDU crew worked from February 1983 to March 1985. Initially, SOU shot reconnaissance lines in Cebu. It was during this time that economic problems were being felt and a cutback in exploration became inevitable. Consequently, the GSI contract extension was disapproved and SOU had to take on the Mtindoro program as well. To take advantage of the weather window, SDU moved to West Mindoro in February 1984. By June of that year, the rainy season prompted a move to Cebu. Upon completion of the Cebu program, SOU returned to Mindoro in November 1984 and completed the Mindoro survey in March 1985. SOU acquired a total- of 1,062 line kilometers: 604 kilometers in Cebu and 458 kilometers in Mindoro. Production in Cebu was about 46 kilometers per month, against the appraisal estimate of 40 kilometers per month. The use of modified Canterra rigs and foam pumps iccelerated shothole drilling in Cebu. In West Mindoro, SOU's monthly production rate surpassed the appraisal estimate of 4J kilometers per month. In M4indoro, the seismic coverage was more extensive than planned: 1,736 kilometers acquired against 1,200 kilometers planned during appraisal. Modification in the Mindoro exploration program was indicated by new geological, aeromagnetic and preliminary seismic data. Annexes B and C show the seismic coverage in Mindoro and Cebu. In the third area, Cotabato, no seismic work was undertaken due to the economic crisis faced by the Philippine government since 1984. Seismic Data Processing and the Computer Center For the processing of seismic data from Mindoro and Cebu, two measures were taken. First, PNOC-EC contracted the services of Digicon, Singapore to process the data to be acquired by the two seismic field.crews. Second, subsequent to the appraisal, it was then decided to establish an in-house processing center. Computer hardware and software, as needed, were to be purchased using proceeds of three Bank Loans: PNOC EC's (2202-PH); the complementary loan to BED (2201-PH) and the loan for Geothermal Exploration to PROC (2203-PH). The processing center would serve  - 15 - 2202-PH Petroleum Exploration Promotion Project Completion Report PN4OC Exploration Corporation the processing needs under the three loans. The Bank gave its approval to the proposal and the utilization of part of the allocation for seismic and other surveys contained in the loans for the installation of the processing center. The system proposed by Seismograph Services Corporation of USA (SSC) was evaluated as the most suitable. SSC undertook to deliver, install and maintain initially a VAX 11/780 computer. The center began operations in May 1984. With the establishment of the processing center, the processing by Digicon at Singapore was limited to 1,255 kilometers. The processing center started with the task to process 8,306 line kilometers of marine data for the BED, and other land data under the project not yet assigned to Digicon. Since 1985, the center has been operated and maintained by an all-Filipino staff. It has processed the bulk of seismic data acquired by PNOC-EC and BED for the Petroleum Exploration Promotion Project, aside from reservoir simulation of PNOC-EDC's geothermal data. The processed seismic sections turned out to be of consistently good quality, except in areas where the acquired raw data were of poor quality to start with. Plotted outputs oa electrostatic paper are of high quality. Since the center is not equipped with a photographic plotter, plots on electrostatic film are prone to uzipperu effects, scratching and yellowing. SSC provided software updates with Bank funding until 1987. SSC also replenished the initial spare parts inventory delivered in 1984 at no additional cost to PNOC up to 1987. Thereafter, the center purchased parts through bidding from suppliers including SSC. The main economic benefits of setting up the center were availability of the equipment and technical knowhow to PNOC after the seismic processing program was over. This transfer of technology would not have been possible if PNOC had spent the equivalent funds on hiring the services of processing centers abroad. At the same time, the cost of operating the center has been low due to the relatively low compensation levels of local personnel. PtIOC-EC did not reprocess Northern Luzon data under the Project. Survey Results The results of the geological and geophysical surveys in lindoro and Cebu opened new-areas where several play types have been identified, thus enhancing the chance of finding commercial oil pools in these areas. In the course of the exploration work, seismic leads and several prospects have been mapped and developed for drilling tests. Basic information on the basins are synthesized and collated into a data package for Mindoro and for Southern Cebu Basin.  - 16 - 2202-PH Petroleum Exploration Promotion Project Completion Report PNOC Exploration Corporation Drilling and Promotion Instead of drilling exploratory wells under the Project, PNOC EC decided to invite partners to join in the drilling operations. PNOC EC maintained dialogues with several companies. A promotion package was also prepared for both Mindoro and Southern Cebu. The preparation of promotion materials was extended beyond 1985 to accommodate additional data acquired during the year, such as laboratory analysis of rock samples and seismic data. The timing of a promotion was also influenced by the local economic and political situation in 1984 through 1986. PNOC EC joined the Office of Energy Affairs (OEA), formerly the BED, in a worldwide promotional campaign in September 1987. After the joint presentations in Manila, Houston, Calgary and London, the PNOC EC team proceeded to Australia. The members of the promotional team, the presentation agenda and the participants of the joint presentation are attached as Annexes 0, E, F-1 to F-4. The Australian companies lined up with the assistance of Robertson Research, Australia, are shown in Annex F-5. The promotion packages include geological data that highlight the hydrocarbon potential of Mindoro and Cebu, drilling prospects and leads, and logistical data pertinent to the areas. Areas adjacent to the concessions of PNOC EC in Mindoro and Southern Cebu, have attracted other exploration companies. Offshore southern Mindoro is under application by an Australian company. An American consortium drilled a well in Northern Cebu in 1988. As of the time of this report, PHOC EC has concluded a joint venture agreement with a consortium of local, Australian and New Zealand companies. The consortium will drill at least two wells in 1989 to earn an interest of 46% in Southern Cebu Area. Although several companies seem to be interested in Mindoro, none so far has given a firm offer. Annex G is a listing of companies that had shown some interest in Mindoro and were provided with data packages Training The training part of the project was carried out through a program that ranged from formal short courses to on-the-job training. Ten short courses (Annex H) were conducted in the Philippines by the Boston-based International Human Resources Oevelopment Corporation (IHRDC). All of the PNOC EC and BED  * - 17 - 2202-PH Petroleum Exploration Promotion Project Completion Report PNOC Exploration Corporation technical personnel attended at least one course each. The seismic contractor provided on-the-job training in data aquisition and processing at the job site and in their processing center in Singapore and the U.S.A. A most successful training was in computer system operations and seismic data processing which was conducted by SSC, tne computer hardware/software supplier. Four seismic data processing analysts and geophysicists of PNOC EC and four computer personnel of PNOC EDC were trained for 2 mont.hs at SSC's main offices in Tulsa, Oklahoma; these trainees, together with experienced SSC personnel who were assigned to the newly-opened center of PNOC in the Philippines for one year, processed the bulk of the seismic data for the Bank-assisted BED and PNOC EC surveys. Since 1985 an all-Filipino staff has been processing seismic data for other oil exploration companies and for a governmental agency in the Philippines. Among the clients are the Mines and Geosciences Bureau, Ran Ricks of the Philippines, Trans-Asia Oil and Minerals Corporation and Philippine-Overseas Orilling & Oil Development Corporation. At project inception, PNOC EC had a complement of 36' professional staff, including 15 geologists and geohysicists and 4 engineers. As of 1988, the profesionnal staff still stands at 36, including 19 geologists, geophysicists and seismic data processing analysts as well as 3 engineers. Of the original PNOC EC and EOC personnel who benefited from the training program, at least five geologists and geophysicists, two engineers and three computer center personnel have left the company. V. PROJECT COST AND FINANCING PLAN Together with a front-end fee of USS0.4 million payable to tne Bank, financing the original scope of the project requ- ed USS53.6 million, including a foreign exchange portion of USSk . million. The Bank loaned USS24.0 million to PNOC for the bulk o. the direct foreign exchange expenditures. PNOC agreed to finance an indirecl; foreign expenditure of about US$2.0 million and local costs equivalent to US$28.0 million out of the equity funds (e.g., from the Oil Industry Special Fund and PNOC). The budget constraints of 1985 which almost suspended PNOC-EC's exploration program resulted in the Bank agreeing to cancel effective June 14, 1985 USS3.26 million of the proceeds of the loan. With PNOC's decision to defer the drilling program and instead seek joint venture through the promotion of the upgraded drilling prospects, two additional cancellations to the loan were requested. A US$4.4 million cancellation in August 1986 and another USS2.9 million cancellation on February 19, 1988 were approved by the Bank. Out of the remaining available fund  - 18 - 2202-PH Petroleum Exploration Promotion Project Completion Report PNOC Exploration Corporation balance of US$11.84' million, PNOC drew only a total of US$7.3 million as of loan closing date on Oecember 31, 1988. Tti loan closing date had been extended twice on a yearly period, from 1986 to 1988. With the cutback in the exploration program, actual project cost was reduced to US$19.9 million, including the Bank disbursement of US$7.3 million. Annexes I, J, and K show the comparison between appraisal estimate and actual costs, a summary of PNOC and Bank expenditures and a summary of cancellation and annual disbursement of the Bank. During appraisal, the seismic processing cost was included in the seismic survey estimates. PNOC, however, decided to purchase a computer system which was used to process most of the acquired seismic data under the Petroleum Exploration Promotion Project. For comparison purposes in Annex I, expenditures related to the computer system acquisition and operations are included in "Seismic Survey" costs while the training cost related to computer operations is included in the *Technical- Assistance cost. The additional seismic program in Mindoro caused an overrun in the actual foreign expenditures. Around 1,700 kilometers of seismic, profiles were acquired, as compared to the 1,200 kilometers originally planned. Considertng the work accomplished under the ProJect, the actual costs conform to the appraisal expectations. VI. PROCUREMENT AND DISBURSEMENT Consistent with World Bank's International Competitive Bidding (ICB) procedures, GSI, Seiscom Delta, Digicon, and SSC were selected as contractors. The first conventional land seismic data acquisition contract was awarded to 6SI effective August 1982 for a term of two years. Seiscom Delta won the two year contract for the second seismic crew, operating from August 19d3 to August 1985; the contract was extended for one month up to March 1985 to complete the Mindoro program. Digicon was awarded the processing contract after the evaluation of bids in October 1982. The contract with SSC on the supply of the hardware and software for the computer center was negotiated in February 1983. Consultants and companies that provided specialized services were chosen from a short list approved by the Bank. Intex provided the structural geology consultants while Robertson Research performed the geochemical and reservoir analysis and assisted in the promotional campaign.  -19- 2202-PH Petroleum Exploration Promotion Project Completion Report PtNOC Exploration Corporation The major contracts and the consultants for the Project are shown in Annex L. Major contractual disbursements are summarized in Annex M. VII. EflVIRONMENTAL IMPACT AND SAFETY In line with the Philippine government's policy "to safeguard the environment In the pursuit of energy activities," safety rules and regulations were strictly enforced in all the project's undertakings. Since no wells were drilled under the project, the concern on the disposal of fluids and borehole cuttings is not applicable. Although dynamite was used in land seismic acquisition, the relatively small charge sizes did not rdise prohlems with the local residents or with government officials. VIII. GENERAL COMMENTS The performance of contractors and individual consultants met the expectations of PNOC EC. Their work under the Project was generally conducted with a high degree of professionalism. PNOC EC is appreciative of the support given by the Bank personnel, for advice given on technical and operational matters and insights shared with PNOC EC staff and management. IX. CONCLUSION The PNOe EC component of the Petroleum Exploration Promotion Project may be considered a success to some extent. Although the exploration program was scaled down from three to two areas, the resultigig technical packages rekindled interest in the Philippines. Promotion efforts were partially successfull with PUOC EC's joint venture agreement with a consortium of local and foreign companies to drill exploratory wells in Southern Cebu in 1989. A parallel objective was met as the Project upgraded the technical capability and competence of the Filipino staff through exposure to standard industry practices in petroleum exploration. PNOC EC can now offer to the industry its facilities for seismic data processing. The ultimate measure of success - a commercial oil or gas discovery - is hoped for in the future.  - 20- ANNEX A PNOC-EC o AREAS OFINTEREST ,~~ ~ ~~~ s o m ln Zu U Jz 0 0 Is 0SAMAR ef t ^ 5~LU 2 0 N 4 NV,^ ..~~~~~~~~~* *.'.; A. ., ' . A 'B* f 'I v - p  -21- a ANNEX B AV't 3 PASS4Ce 'SL4ND PASSA#I I~~~~~~~~~~~~~~~~~~~~~~~~~~~I ISLA$*~~~~~ $90ce * U 0 0 I gaI ' tooo *SEISMIC COVOERDEmsw MINDORO ISLAND  -22- ANNEX C UWNSEISMIC COF NO -I