Zambia - Petroleum Exploration Promotion Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 9590 PROJECT PERFORMANCE AUDIT REPORT THE REPUBLIC OF ZAMBIA PETROLEUM EXPLORATION PROJECT (LOAN 2152-ZA) Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. COUNTRY EXCHANGE RATES Zambian Kwacha (ZY)/US$ Appraisal Estimate (1981) ZK1.00 = 1.2 US$ Actual: Average 1982 = 1.077 Average 1983 = .800 Average 1984 = .557 Average 1985 = .369 Average 1986 = .137 ACRONYMS AND ABBREVIATIONS Government - Government of the Republic of Zambia GS - Geological Survey, Ministry of Mines HU - Hydrocarbon Unit (also Project Unit) MM - Ministry of Mines MF - Ministry of Finance PPF - Project Preparation Facility PU - Petroleum Unit ZIMCO - Zambia Industrial and Mining Corporation Limited THE WORLD BANK FOR OFFICIAL USE ONLY Washington. D.C 20433 U.S.A. Of** ad ouect(WrCetwal Opwatens Ivaluatmn May 22, 1991 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Performance Audit Report on Zambia Petroleum Exploration Proiect (Loan 2152-ZA) Attached, for information, is a copy of a report entitled "Project Performance Audit Report on Zambia - Petroleum Exploration Project (Loan 2152- ZA)" prepared by the Operations Evaluation Department. Attachment 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. FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT THE REPUBLIC OF ZAMBIA PETROLEUM EXPLORATION PROJECT (LOAN 2152-ZA) TABLE OF CONTENTS Pae No. Preface ............................................................... Basic Data Sheet ..*.................................... ................ 1 Evaluation Summary ................. ................. .............. iv PROJECT PERFORMANCE AUDIT REPORT I. PROJECT BACKGROUND ........................................... 1 II. THE PROJECT ............................ I A. Project Objectives, Description and Processing .............. I B. Project Implementation ................. ......... ........... 2 C. Training ............................ . . . .. . . ........ 5 D. The Exploration Program ..................................... 5 E. Maturity, Grace Period and Exchange Risk ................... 5 F. Audit ............ o............................o.........0...... 6 G. Institutional Development ..... . ........... .. .............. 6 III. CONCLUSIONS ................. .* ........ ..... *......... 7 ATTACHMENT: Comments from the Borrower ....................0......... 11 This doument 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. i PROJECT PRFORMANCE AUDIT REPORT THE REPUBLIC OF ZAMBIA PETROLEUM EXPLORATION PROJECT (LOAN 2152-ZA) PREFACE 1. This is a Project Performance Audit Report (PPAR) on the Petroleum Exploration Project, involving an IBRD loan in the amount of US$6.6 million to the Republic of Zambia to promote crude oil exploration investments by foreign companies. The loan was approved on May 5, 1982. US$1.7 million of the loan was cancelled by the Bank. The closing date was maintained at December 31, 1986. 2. The PPAR is based on the Project Completion Report (PCR) pre- pared by the Africa regional department and issued on November 6, 1989, the President's Report, the loan documents, on a study of the project files. An OED mission visited Zambia in June 1990. The kind cooperation and valuable assistance provided by the Ministry of Mines in the prepara- tion of this report is gratefully acknowledged. 3. The PCR provides a comprehensive account of the project experience. The PPAR elaborates on selected aspects of project implementa- tion, in particular the institutional building aspects of the project, and the performance of the Bank. 4. The draft PPAR was sent to the Borrower for comments. The comments received from the Geological Survey Department are reproduced as an Attachment to the PPAR. ii PROJECT PERFORMANCE AUDIT REPORT THE REPUBLIC OF ZAMBIA PETROLEUM EXPLORATION PROJECT (LOAN 2152-ZA) BASIC DATA SHEET KEY PROJECT DATA Appraisal Actual Actual as % Item Expectations Estimates of Appr, Est. Total Project Cost (US$ million) 8.1 6.4 -21 Loan Amount 6.6 4.9 -26 Date Physical Components Completed 06/86 12/86 Economic Rate of Return (%) n.a. n.a. CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS (US$ million) FY Ended June 30, 1982 1983 1984 1985 1986 (1) Appraisal Estimate 0.46 4.37 5.60 6.55 6.60 (2) Actual 1.66 2.26 3.97 4.71 4.90 (3) (2) as % of (1) 360 52 71 72 74 Date of Final Disbursement: 07/13/1987 PROJECT DATES Originrl Plan Revised Actual First Mention in Files 7/07/81 Negotiations 2/82 4/09/82 Board Approval 4/82 5/20/82 Loan Agreement Date 6/14/82 Effectiveness Date 8/25/82 8/06/82 Closing Date 12/31/86 12/31/86 iii STAFF INPUT Staff-weeks not available in the Project Completion Report (PCR) ----------------------------------------------------------------------------- MISSION DATA No. of No. of Date of Month/Year Days Persons Manweeks Report Identification 8/81 5 2 2.0 5/25/77 Prep/appraisal 12/81 6 3 3.6 5/16/78 Supervision I 4/82 2 2 0.8 4/27/82 Supervision II 8/82 2 1 0.4 n.a. Supervision III 8/82 2 1 0.4 9/15/82 Supervision IV 9/82 15 1 3.0 10/01/82 Supervision V 11/82 5 1 1.0 12/22/82 Supervision VI 3/83 7 1 1.4 3/31/83 Supervision VII 7/83 2 2 0.8 7/26/83 Supervision VIII 9/83 3 2 1.2 10/18/83 Supervision IX 6/84 5 2 2.0 8/15/84 Supervision X 8/84 3 2 1.2 n.a. Supervision XI 9/84 6 1 1.2 10/05/84 Supervision XII 10/84 10 1 2.0 11/16/84 Supervision XIII 2/85 6 2 2.4 3/20/85 Supervision XIV 6/85 5 3 3.0 6/25/85 Supervision XV 11/85 7 2 2.8 12/23/85 TOTALS (Averages) 5.4 1.7 29.2 OTHER PROJECT DATA Borrower: Republic of Zambia Executing Agency: Ministry of Mines, through Hydro Unit Fiscal Year of Borrower: January 1 - December 31 Follow-Up Projects: None iv PROJECT PERPORMANCE AUDIT REPORT THE REPUBLIC OF ZAMBIA PETROLEUM EXPLORATION PROMOTION PROJECT (LOAN 2152-ZA) EVALUATION SUMMARY Introduction 1. The Petroleum Exploration 3. The project's objective was to Promotion Project in Zambia was one enable the Government to attract of the first Bank operation in the exploration investments by foreign petroleum sector and it was designed oil companies in a country never to cover the first critical phase of before surveyed for oil deposits. the country's crude oxsl activity: The structure of the project was promotion of exploration correspondingly simple. There were opportunities among the international two components: (1) the geological oil industry. ZambiA is a country surveys of three regions, and (2) the endowed with minerals, among which related technical assistance for copper is the most important, and institution-building purpose. The with a diverse set of energy project was justified by the resources, but no crude oil was as signature of a large exploration yet located. At the time of the contract which made more urgent the project, after the Second Oil Shock, mobilization of expertise to assist the Government's strategy was to the authorities in their dealing with ach.eve a greater self-sufficiency in this first foreign oil company, in energy. Petroleum was entirely interpreting the airmag survey, and imported to satisfy the demand. in drafting the new legal framework During the eight years ending in governing the oil activity. 1980, varied refined oil imports increased tenfold; in 1980, these 4. The project was processed in a imports absorbed 12% of all export short time. The official request for revenues. financing assistance was made in August 1981 and a Project Preparation 2. Until the project was prepared, Facility (PPF) was in place within oil was devoted marginal institution three months and the Bank loan was capacity as there was little made six months afterwards. The expectation of finding any in Zambia. effectiveness was triggered by the The Mines and Minerals Act of 1970 establishment of the Hydrocarbon Unit was a mineral-oriented code, thus not (or Project Unit, PU) in the Summer adapted to modern oil exploration of 1982. This compact timetable practices. The Ministry of Mines reflected well on the Bank as a (MM) had overall responsibility for lender when time was of the essence all geological resources, which until PPAR, para. 2.02). the early 1980s was also mainly copper. The technical arm of MM, the 5. Despite its design simplicity, Geological Survey (GS), had been project implementation was not established in the 1940s, but there problem-free. The lack of aviation was no petroleum geologist among its fuel stopped the air magnetic surveys 40 staff. several times despite the careful V fuel needs planning and the high 8. The exploration promotion priority given to the operation and effort met its objective with a the appropriate cleararces obtained meeting in London in June 1985 where beforehand from the military the results of the airmag surveys authorities responsible for were sold to twelve interested overflights. The surveys were companies. Two of them (Mobil and eventually completed close to the Placid Oil) purchased exploratton original schedule. Loan acreages. Placid Oil drilled two disbursements lagged considerably wells, b.t they were dry. Mobil behind expectations, however, due to decided not to drill based on organizational problems with the PU preliminary exploration. The two (PPAR, para. 2.04). companies spent US$21.2 million, far exceeding their minimum crntractual 6. The establishment of the obligations (PPAR, para. 2.12). Hydrocarbon Unit responded to the After loan closing, various companies need to have technical counterparts have continued to show an interest in to the foreign oil companies which prospecting in Zambia (PPAR, para. would be drawn by the scheduled 2.17). promotion campaign. The personnel administration problem raised between 9. The cancellation of 26% of the the new PU. the older GS and their loan amount cut by only six months ministry resulted in a long period of the 12.6- years of funds availability ineffectiveness for the PU. The as measured by the Average Loan Life dispute arose over the salaries of indicator. The exchange risk, due to the two highest-ranking officers of the currency-pooling system, the PU. The project coordinator and accumulated until May 31. 1990 cut it the accountant were fired in November further. Despite this drawback, 1982 because of the double salary albeit not unexpected, the actual which they received from the terms of the Bank loan were Geological Survey (their original appropriately matching the scheduled administration) and from the PU (to duration of the exploration program. which they had been appointed with The lack of oil discovery prevented the Bank's agreement given on the PU. however, to generate any cash technical ground). Intervention by flows to contribute to the debt the highest levels of Government was servicing (PPAR, para. 2.13-2.14). necessary to reinstate the head of the PU and to unlock unprocessed Conclusions and Lessons disbursement requests (PPAR, para. 2.05). 10. The objective of the project was primarily to attract foreign oil 7. Once the PU was functioning companies to Zambia to undertake again, the disbursements continued to crude oil exploration for the first lag at only 40% of appraisal time. The availability of a PPF, the estimates (PPAR, para. 2.08). quelity of foreign technical Another dispute affected the end of assistance recruited and the project implementation. The frequency of Bank supervision undisbursed portion of the loan missions helped meet the objective. (US$1,706,604) was cancelled on July The promotion effort was crowned wh 13, 1987, seven months after the a meeting in London in June 1985 official closing date. where the results of the airmag vi surveys were sold to twelve to contractors), a more forceful interested companies. Two of them action could have been considered to (Mobil and Placid Oil) purchased hasten a satisfactory resolution of exploration acreages, drilled two the organizational problem. Indeed, wells (dry) and spent over US$21 as the staffing procedure had been million. Given the initial US$6 agreed between the Bank and the million investment, it was a Government, it should have benefitted commendable cost-benefit ratio for a from the same protection as the Loan risky project. Agreement offers to covenants formally negotiated. 11. To,.ard the end of its cycle, the project outcome deteriorated. 13. By the closing date, The rationale for the Bank's exploration efforts financed out of intervention was the observation that the loan had not born results. The developing non-oil producing end of the Bank project did not countries were faced with a growing interrupt them, however. Several energy imports bill. As oil prices companies have shown an interest in were anticipated to increase further pursuing some activities, in many (see Figure 1), it was timely for cases limited to interpreting Zambia to get involved in petroleum existing data. It is clear that the exploration. The main lesson to be Bank loan started the process. To learned from this project is that that extent, the project c&n be Bank financed technical assistance in considered sustained and sustainable petroleum, to help start a country as long as the PU is budgeted for. with no previous background in The core team of geologists in the contacts with foreign oil companies, unit has both the capacity and the no local expertise and no dedicated capability to handle the current flow institution, was a crucial devel- of oil companies visiting Zambia. If opment lending initiative. The fact the exploration activity was to that the benefits from the project increase, however, there would be a were lower than expected does not need for strengthening the PU with negate the effort. more trained staff and fundings to undertake joint-ventures with foreign 12. Delays occurred in forwarding partners. Alternatively, this could disbursement requests to the Bank be achieved in the short-term by because two key staff of the PU (the merging it into the Geological Survey unit coordinator and the accountant) until time can justify establishing a were suspended twice. The problem was self-supporting national oil company resolved after intervention from the if there is a commercial discovery. highest levels of Government. In the meantime, close to one year of 14. The training component, key for dczision-making was in limbo because the sustainability of the PU's role, of the uncertainty weighing on the was a mixed success because the PU's staffing and leadership. training and exposure of staff sent Moderate pressures were anplied by abroad was considerably more the Bank in what seemed to ..ave been productive than the attempts at on- a politically-inspired episode. the-job traini .,,. AlLhough more Given, however, that it dragged on costly, the tr'p and stay abroad with direct implications on the acted as a strong incentive on the project's implementation schedule selected individuals. Conversely the (e.g., interpretation of the airmag benefit-cost tradeoff was the survey and disbursement of bills due practical limit on the number of vii persons who could be trained in this which was nct fully justified in a manner even though some or all the first operation in a new secter. costs were born by the foreign Having the PU undertake more surveys contractors and oil companies under to sign up more oil companies would the project. The expectations about have improved its prospects of training local technicians were repaying the loan albeit a greater unrealistic given the heavy schedule amount. The lesson to be drawn from of airmag surveys and the limited this case is that actions should be number of foreign experts with taken to avoid giving the impression sufficient time available for that Bank's support fades on the eve training (PPAR, 2.11). of the closing date. Zambian authorities were correct in arguing 15. The performance of the Bank was that the Bank should be more flexible positive in the initial years, but in the manner in which the loan the frequenzy of supervision was on granted can be utilized by the the dense side. From 1982 to 1985, Borrower who, in the end, bears the three to four supervision missions entire risk (PPAR, para. 2.12). In were made every year in an effort to turn, this implies that the Bank's assist Zambian authorities in technical staff not only pay building up its petroleum exploration attention to technical issces but capability. Given the scope of also put them in the broader outstanding issues, this frequency developmental and socio-political was above norm and the cost perspectives specific to the efficiency of this approach may have borrowing country. been doubtful in regard to the loan size. In contrast, there was no 17. Overall, the provisioi, of supervision mission during the last technical assistance and of finance year, 1986, when disagreements on the to launch petroleum exploration in future directions of the exploration countries forgotten by the major oil program surfaced. This change in the companies was in the early 1980s, and rhythm of field visits appears to still is in the early 1990s, a have been detrimental to Zambia's worthwhile concept. It could be interests (PPAR, paras. 2.09-2.10). revived if it is confirmed that the oil price has resumed an upward trend 16. The adamant refusal by the Bank or reached a level substantially to accept the borrower's request to higher than that observed during this use undisbursed funds to finance an iroject implementation. Another additional promotion program around lesson, from this high risk project, the closing date without the benefit is that it should not be considered a of a field visit underscored the failure if crude oil has not been souring relationship. In the discovered. The geological knowledge background of disagreements between has been greatly improved and the Zambia and the IMF early in 1987 cost of acquiring it has been (PPAR, para. 2.10), the Bank's worthwhile. The return on the concern was mostly technical whereas institution building achieved thus the authorities wanted to seize the far is also invaluable in the light opportunity of an available financing of a possible renewed exploration to improve the data base handed to effort if the oil price cycle prospective oil companies. It was a justifies a new interest to be given judgement call never really opened to in Zambia. debate between the Bank and Zambia, PROJECT PERFORMANCH AUDIT REPORT THE REPUBLIC OF ZAMBIA PETROLEUM EXPLORATION PROMOTION PROJECT (LOAN 2152-ZA) 1. PROJECT BACKGROUND 1.01 At the time of the project, after the Second Oil Shock, Zambia was endowed with a diverse set of energy resources, some of them only potential, but there was no crude oil. Demand was satisfied in a typical manner in this region, by burning forest wood ind building dams to tap river flows. The traditional firewood and charcoal which met 45% of needs were in declining supply as also observed elsewhere in Africa. Hydropower generation capacity was 1,600 MW with room for further expansion and accounted for 31% of consumption. Geothermal units had been considercd on and off to supply electricity in remote areas. Untapped potentials existed also for solar and wind energy although no practical program was underway. Petroleum was entirely imported to satisfy the demand. Varied refined oil imports increased tenfold in the eight years ending in 1980; that year, these imports absorbed 11.8% of all export proceeds. Recent growth in Government consumption and investments (26% and 24% respectively in 1981) was putting a pressure on limited foreign currency reserves. 1.02 Until the project was prepared, there was limited institutional capacity to deal with oil because there was little expectation of finding any in Zambia. Only two studies of oil potentials had bee: carried out previously and the Geological Survey Department (GS) completed the first definition of the sedimentary basins. The Mines and Minerals Act of 1970 was a mineral-oriented code, thus not adapted to modern oil exploration practices. The Ministry of Mines (MM) had overall responsibility for all geological resources, which until the early 1980s was also mainly copper. The technical arm of MM, the Geological Survey (GS), had been established in the 1940s and there was no petroleum geolo- gist among its 40 staff. Because of this vacuum, ZIMCO (Zambia Industrial and Mining Corporation), the large national holding company, was considered early on as the executing agency for the project. Despite the dire lack of experience on the Zambian side, a Canadian company (Luena Hydrocarbon) signed an exploration contract for a large 15-block area in August 1981. To build up a new counterpart organization able to dialogue and negotiate wi-h foreign partners would have be*n a time-consuming task. The alternative was to import temporarily foreign exper- tise through a comprehensive technical assistance plan. This was the main justification for the Bank intervention. II. THE PRrJECT A. Project Objectives. DescriptIon and Processing 2.01 The project's objectives were straightforward. The goal was to enable the Government to attract exploration investments by foreign oil companies in a country never before surveyed for oil deposits. The structure of the project was correspondingly simple. There were three components: (1) the geo- logical surveys of three regions, and (2) the related technical assistance. The project was justified by the signature of a large exploration contract which made more urgent the mobilization of expertise to assist the authorities in their 2 dealing with this first foreign oil company, in interpreting the airmag survey, and in drafting the new legal framework governing the oil activity. 2.02 The project was processed in a short time. The Bank was first approached during an international conference on petroleum exploration, in March 1981, where the GS presented a paper titled "Hydrocarbon Potential of Zambia." The official request came five months later. A Project Preparation Facility (PPF) was in place within three months and the Bank loan waR made available another six months afterwards. The loan conditionality was limited to the establishment of a Petroleum Unit (PU) under the aegis of the Geological Survey (GS) itself the technical arm of the Ministry of Mines (MM). As there were no Zambian trained in the petroleum field, the PU had to be set up by borrowing staff from the GS, which created a problem later on. Effectiveness quickly followed the credit signature in the Summer 1982. B. Project Implementation 2.03 Implementation of the project had started before the loan became effective through the assistance of the PPF advance (approved in February 1982). The advance was needed to hire without delay consultants to prepare the terms of reference (TOR) for the geological surveys, to lobby foreign oil companies, and to supervise the bid procedures. Initially planned for US$600,000', the final amount was set at US$1 million. 2.04 The lack of aviation fuel hampered the air magnetic surveys several times despite the careful planning and high priority given to the operation and the appropriate clearances obtained beforehand from the military authorities responsible for overflights. At one point, the Bank offered to finance the necessary imports of avgas out of the Loan, but Barclays Bank opened a letter of credit to the same effect, thus confirming that the problem was not financial in nature, but one of coordination among administrations. After the issue was brought to the attention of the President of Zambia, the survey progressed close to the schedule. 2.05 A dispute over the salaries of the two highest-ranking officers of the PU affected the project, albeit more the loan disbursements than the project implementation for one year. The project coordinator and the accountant were fired in November 1982 because of the double salary which they received from the Geological Survey (their original administration) and from the PU (to which they had been appointed with the Bank's agreement given on technical ground). This fact was known of all parties concerned when the PU was established and staffed in May 1982. Drawing expertise from the GS, which had a similar sectoral experience to that required from the PU, was the best practical solution at the time. It was also logical that the two officers would be adequately compensated for their additional tasks. They were suspended in October 1982, then cleared by the Actorney General's office the following December. In February 1983, they were suspended from duty again. They were exonerated in August 1983 after the issue was submitted to the President of Zambia for decision. In the meantime, the PU was leaderless and without adequate accounting. Delays in paying contrac- Initial Project Brief (October 9, 1981). 3 tore developed during that period. which required also the intervent.'on of the President to process a backlog of disbursement requests. 2.06 Overall this incident illustrates the side problems which can be created with special project units. If it must be set up rapidly to trigger loan effectiveness, the search for competent and experienced candidates is limited in practical terms. In this case, there was no petroleum engineer in Zambia; therefore, borrowing staff from the GS was the closest solution. Yet, often it will amount to deplete one old administration in order to staff a new institu- tion. To avoid this zero sum game, it was decided for efficiency reasons to give two GS officers temporarily a double duty. The issue was not technical, but rather of principle as to whether it was appropriate for civil servants to receive double pay regardless of the special circumstances. This Audit was not able to exchange views on this one-year hiatus in the functioning of the PU.2 2.07 The supervision report of October 28, 1983 recorded the PU once again functioning, but the disbursements being only 40% of appraisal estimates. The airmag survey, which was the largest physical component of the project, was then completed and was being interpreted by a Denver firm. 104,432 line km of survey had been recorded. Two of the ten areas covered were considered "prospective" and five others as "possibly prospective".3 The contractor recommended to fol- low up with gravity and magneto-telluric surveys, and shallow bore holes. Given the cost cf this additional program, the Bank advised the authorities to hire another geophysical firm to conduct another independent interpretation of the airmag results. This appears to have been a policy of the Bank to recommend a second opinion in matters so subject to varying interpretations as geophysical prospection. 2.08 The first supervision report (November 1982) noted that disbursements were only 24% of target. It was still only two months after credit effectiveness and few of th. eligible expenditures had been documented although already expended with about 60% of the airmag survey completed. The disbursement per- formance was affected by the administrative imbroglio which essentially stopped PU's processing of disbursement requests for one year. At one point, the firtu doing the crucial interpretation of the airmag survey notified it would stop interpreting if its US$400,000 invoice was not paid. Avoiding a complete stop of the p-.:oject implementation was time consuming and required intervention by the highest levels of Government. By the time the administrative dispute was over, disbursements were still only 40% of target.4 The pace did not improve after- wards with actual disbursements still 40% of target nine months later. 2 The Minister of Mines informed the Bank that the initial head of the PU was reappointed at this post in October 1984, but the project files and correspondences shows a different manager of the PU from December 1983 on. The first head of the PU is now the director of the GS. The accountant was, however, transferred out of MM in No- vember 1983. Aide-memoire about meeting in Denver (December 13, 1983). Supervision report (October 28, 1983). 4 2.09 The undisbureed portion of the loan (US$1,706,604) was cancelled after the last disbursement request was processed on July 13, 1987. seven months after the official closing date. During that period, a dispute arose between the authorities and the Bank about whether and how to use the remainder of the loan. The PU suggested doing more seismic surveys in order to launch a second promotion campaign. Operations staff of the Bank disagreed for several reasons. Foremost was the conviction that there was little likelihood of further successful prospection based on the data obtained thus far. The economics of Zambia under- taking additional expenditures on its own were also challenged. It was argued that it would be too costly to finance these on the Bank loan and that they would best be carried out by private oil companies.5 2.10 The difference of opinions was not an issue in itself, more like the norm at this stage of the oil exploration cycle. The Bank used the pretext of the closing date to impose its viewpoint, however. Although the first request was made to the Bank as early as August 1985,' reaction to it was postponed, first, until a scheduled mission (October 1985)', then until after the deadline for bids to be submitted by oil companies (mid November 1985).6 There was then still over 14 months until the original closing date of end 1986. When the promised reaction from the Bank did not come, the PU requested a one-year exten- sion of the closing date, but the request was made in January 1987.9 This was legally after the official closing of the loan although disbursement requests were satisfied until July 1987. The Bank reply (the first in writing on the issue) argued that there was "no technical or economic justification" to finance seismic surveys from the undisbursed balance.10 The request for a new closing date was nevertheless repeated, this time by the Ministry of Finance." The Bank notified its refusal over two months later using a dubious argument. It reminded that using the loan for seismic surveys "would not be consistent with the Government's policy of discouraging loans for high risk investments". Given that the request was coming from the Ministry of Finance, it is presumed that the Government was making an exception to its policy in order to increase the opportunity of finding crude oil in the country. Still the Government asked Telex to the PU (February 3, 1987). 6 Letter from the Minister of Mines (August 1, 1985). Letter to the Minister of Mines (August 23, 1985). Briefing memorandum for lunch with Minister of Mines (October 22, 1985). Telex from the PU (January 27, 1987). Telex to the PU (February 3, 1987). Telex from Ministry of Finance (February 27, 1987). 12 Telex to Permanent Secretary of the Ministry of Finance (May 6, 1987). 5 for a reconsideration which the Bank denied.13 Eventually the argument of the closing date being passed by six months was self-fulfilling given that all the procrastination was due to the Bank. Furthermore, there was only one supervision mission after the initial Government request and it did not address the demand nor made any recommendation.14 This lack of flexibility vAs also dictated by the suspension in May 1987 of all loans to Zambia following its failure to adhere to the IMF-approved program in early 1987. C. TraininR 2.11 The training of one geologist and one geophysicist in the U.S. in 1982 was a success. In contrast local training of lower level staff was a failure because of lack of interest or outright absenteeisra. This issue was raised in the first supervision report (November 1982). Foreign contractors were asked to give priority to the training or at least the exposure of their local counterparts to their task (e.g., airmag surveys). D. The Exploration Program 2.12 The promotion effort was crowned with a meeting in London in June 1985 where the results of the airmag surveys were sold to twelve interested companies. Two of them (!!z!il and Placid Oil) purchased exploration acreages in three of the four blocks offered. Placid Oil signed a two-block agreement and drilled two wells in block A, but they were dry. On block C (50,000 sq. km), Placid Oil decided after preliminary exploration to relinquish its acreage in 1987. In all it spent US$16.3 million before suspending all activities in agreement with the authorities. Mobil signed an agreement in January 1987 on block B (40,000 sq. km). Preliminary exploration did not justify drilling and the acreage was relinquished in July 1988 after spending US$4.9 million. Block D, the lurgest of all (180,000 sq. km), was not taken and the PU tried to undertake more geophysical work, but the Bank refused to finance under the loan (PPAR, paras. 11-12). The poor results of the exploration program explains in part why the Bank did not approve additional expenditures to be financed out of the loan, although the PU's objective to revamp its promotion effort indeed required more data to be gathered at its own expense. In July 1988, Mobil relinquished block B, but kept its interest in block E. At the end of 1988, Placid Oil obtained a one-year suspension of its contract to analyze the gathered data. E. Maturity, Grace Period and Exchange Risk 2.13 The Bank loan was granted to the Government of Zambia. The interest rate was set at 11.6% and is fixed until maturity in 2002; the front-end fee (US$97,537) was capitalized into the loan. Terms were a maturity of 20 years, including 5 years of grace. Repayments to the Bank started in 1990, well after the scheduled end of the exploration program. If it had been successful, these terms would have provided Zambia through fungibility with funding for the 13 Communications through the Resident Representative (June 5 and 15, 1987). 14 Back-to-Office Report (December 23, 1985). 6 development expenditures (see next para.). Unfortunately, no commercial oil was discovered. This meant that the servicing of the Bank loan will be coming from the Government's budget rather than the anticipated oil revenues. The fiscal burden is already substantial partly due to the exchange risk. Only one year into the debt servicing, the accumulated exchange risk accrued in the debt outstanding was already 50% as of May 31, 1990; after the principal repayment was made, it fell to 28% as of August 31, 1990. 2.14 The availability over time of funds can be measured by an indicator called Average Loan Life (ALL). It is defined as the ratio of (a) the sum, until maturity, of the loan balances (in dollars) outstanding at the end of each year over (b) the loan amount net of cancellations. This indicator measures the number of years during which the entire loan proceeds stay effectively at the borrower's disposal. The faster the disbursements and the slower the repayments, the longer the availability of loan funds. In the case of Loan 2152-ZA, it had an expected average loan life of 12.6 years at the time of appraisal. As noted above, this was substantially in excess of the time scheduled for prospection. The cancellation of 26% of the loan amount cut only six months of funds avail- ability. The exchange risk due to the currency-pooling system accumulated until May 31, 1990" cut it drastica3ly, however, to 5.4 years (assuming no improve- ment or worsening in the exchange risk after that date). This indicates that the actual terms of the Bank loan were appropriately matching the exploration program. They would not have permitted, however, the preliminary funding of a follow-up development program in case of an oil discovery, which a contrario would have been feasible without the large exchange risk.1 If the Zambian Kwacha was to continue to depreciate at the pace observed during the last five years, the actual availability of Bank funds could be cut further to the point where the loan would have more the nature of a short-term rather than a long-term development loan. F. Audit 2.15 Overall, the external audit of the PU's accounts was not an effective tool for monitoring the project because the annual reports were considerably late. For example, the 1985 audited accounts were sent to the Bank in February 1988 when the loan had been officially closed for fourteen months already. Given the nature of the project, however, the financial performance of the recently established PU was not meaningful as long as it did not generate its own cash flows. G. Institutional Development 2.16 The project being a technical assistance program hinged on an important institutional building effort which was crucial for the sustainability of Zambia's petroleum policy. The establishment of the Hydrocarbon Unit (PU) responded to the need to have technical counterparts to the foreign oil companies 15 Deadline for data zollection for this PPAR. 16 Without excchange risk, the ALL was 12.0 years instead of 5.4 with it. 7 which would be attracted by the scheduled promotion campaign. The personnel administration problem raised between the new PU. the older GS and their ministry resulted in a long period of ineffectiveness for the PU. This translated in delayed disbursement requests, unsatisfied contractors and supervision time focused away from the task of strengthening a core unit of petroleum engineers and technicians. When the episode was over, the new project coordinator was appointed for less than three months and his replacement was only available part- time." 2.17 The current unit has been able to administer the constant interest shown by foreign oil companies despite limited staffing. Mobil Oil acquired the exploration rights in block E (Lake Kariba) to complement a block in Zimbabwe. Placid Oil drilled two holes. AGIP. while searching for uranium, assessed Placid's materials, but concluded negatively on the prospects short of having more drilled holes available for evaluation. CONOCO and Iran Oil Company sent teams to discuss possible ventures. A Canadian promoter proposed to undertake seismic surveys in 1990. III. CONCLUSIONS Conclusions and Lessons 3.01 The objective of the project was primarily to attract foreign oil companies to Zambia to undertake for the first time exploration for crude oil. The availability of a PPF, the quality of foreign technical assistance recruited and the frequency of Bank supervision missions supported a successful project. Toward the end of the project cycle, however, the outcome deteriorated. The rationale for the Bank's intervention was the observation that developing coun- tries were faced with a growing energy bill, mostly imports when they were not oil-producing countries. As oil prices were anticipated to increase further (see Figure 1), it was timely for Zambia to get involved in petroleum exploration. The main lesson to be learned from this project is that technical assistance in petroleum to help start a country with no previous background in contacts with foreign oil companies, no local expertise and no dedicated institution was a crucial development lending initiative. The fact that the benefits from the project were lower than expected does not negate the effort. 17 The Borrower and the PCR (para. 17) claim that it caused only minor delays in implementation. CRUDE OIL PRICES 1973 - 2000 ACTUAL & FORECAST $60.00- $70.00- .*^ $60.00- * ** * WORLD BANK CRUDE OIL PRICE FORECAST MADE IN 1980 $50.00- UA $ 40.00 co g$300.00- $2w 0 OiATA RD $20.00 WORLD BANK CRUDE OIL PRICE $10.00- FORECAST MADE IN 1989 $0.00 I I 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 YEAR elU 9 3.02 Delays occurred in forwarding disbursement requests to the Bank because two key staff of the PU (the unit coordinator and the accountant) were suspended twice. The problem was resolved after intervention from the highest levels of Government. In the meantime, close to one year of decision-making was in limbo because of the uncertainty weighing on the Petroleum Unit's staffing. Moderate pressures were applied by the Bank in what seemed to have been a politi- cally-inspired episode.1 Given, however, that it dragged on with direct impli- cations on the project's implementation schedule (e.g., interpretation of the airmag survey and disbursement of bills due to contractors), more could have been considered to hasten a satisfactory resolution. Indeed, as the staffing proce- dure had been agreed between the Bank and the Government, it should have benefited from the same protection that the Loan Agreement offers to covenants formally negotiated." 3.03 By the closing date, exploration efforts financed out of the loan had not succeeded. The end of the Bank project did not interrupt them, however. Several companies have shown an interest in pursuing some activities, in many cases limited to interpreting existing data. It is clear that the Bank loan started the process. To that extent, the project can be considered sustained and sustainable as long as the PU is budgeted for. The core team of geologists in the unit has both the capacity and the capability to handle the current stream of oil companies visiting Zambia. If the exploration activity was to increase, however, there would be a need for strengthening the PU with trained staff and fundings to undertake joint-ventures with foreign partners. Alternatively, this could be achieved in the short-term by merging it into the Geological Survey until time can justify establishing a self-supporting national oil company if there is a commercial discovery. 3.04 The training component, key for the sustainability of the PU, was a mixed success because the training and exposure of staff sent abroad was consid- erably more productive than the attempts at on-the-job training. Although more costly per staff trained, the feature of a trip and stay abroad acted as a strong incentive on the selected individuals. The benefit-cost tradeoff is the practi- cal limit on the number of persons who can be trained in this manner, but it is worthwhile because some or all the costs were born by the foreign contractors and oil companies under the project. The expectations about training local techni- cians were tio high in this case given the heavy schedule of airmag surveys and the limited number of foreign experts with sufficient time available for train- ing. 3.05 The performance of the Bank was positive in the initial years, but the frequency of supervision was on the dense side. From 1982 to 1985 there were 3 or 4 supervision missions every year in an effort to assist Zambian authorities in building up its petroleum exploration capability. Given the scope of out- standing issues, the frequency of missions was above norm and the cost efficiency i This qualification is found in one memorandum (November 9, 1982). 19 The Borrower claims that the personnel action was an administrative one. 10 of this approach may have been doubtful in regard to the loan size. After 15 visits in 4 years, there was no supervision mission during the last year, 1986, when disagreements on the future directions of the exploration program surfaced. This contrast strikes as being detrimental to Zambia's interests. 3.06 The adamant refusal by the Bank to accept the borrower's request to use undisbursed funds to finance an additional promotion program around the closing date without the benefit of a field visit underscored the souring of the relationship. On the basis of the need for mission, the difference of opinions about the request for additional surveys to be financed out of the loan balance justified a visit to gather the views of all officials involved, including from the non-technical ministries such as the Ministry of Finances which was repre- senting the Borrower. The Bank's concern was mostly technical whereas the authorities wanted to seize the opportunity of an available financing to improve the data base handed to prospective oil companies. It was a judgement call never really opened to debate between the Bank and Zambia, which was not fully justified in a first operation in a new sector in this country. Ensuring sus- tainability involves a wide array of possible actions including inter alia putting the executing agency in a better position to service the debt. Having the PU undertake more surveys to sign up more oil companies would have improved its prospects of repaying the loan albeit a greater amount. The lesson to be drawn from this case is that actions should be taken to avoid giving the impres- sion that Bank support fades on the eve of the closing date. Zambian authorities were correct in arguing that the Bank should be more flexible in the manner in which the loan granted can be utilized by the Borrower who, in the end, bears the entire risk. On the other hand, the Bank's flexibility became limited after Zambia moved off the IMF-approved program and the Bank had to suspend its lend- ing. 3.07 Overall, the provision of technical assistance and of finance to launch petroleum exploration in countries forgotten by the major oil companies was in the early 1980s, and still is in the early 1990s, a worthwhile coxcept. It could be revived if it is confirmed that the oil price has resumed an upward trend or reached a level substantially higher than that observed during this project implementation. Another lesson, from this high risk project, is that it should not be considered a failure if crude oil has not been discovered. The geological knowledge has been greatly improved and the cost of acquiring it has been worthwhile. The return on the institution building achieved thus far is also invaluable in the light of a possible renewed exploration effort if the oil price cycle justifies a new interest to be given in Zambia. ATTACHMENT Cornmeneraions should be oddieised to th, Director In reply plemse quote -dephoe O. E A lito.. GS/102/3/3/5/2/3 Telegramis: GEOCENTRAL REPLBLIC OF ZAMBIA GEOLOGbCAL SURVEY DEPARTMRENT COMMENTS FROM THE ZORROWER P.O. BOx 50135 RIDGEV A'. LL'SAKA 4th January, 1991 Mr. Jozsef B. Buky, Acting Chief, Operations Evaluation Department, The World Bank, 1818 H. Street, NW WASHINGTON DC 20433 UNITED STATES OF AMERICA. Dear Mr. Buky, ZAMBIA: PETROLEUM EXPLORATION PROJECT (LOAN 2152 ZA) COMMENT ON PROJECT PERFORMANCE AUDIT REPORT (PPAR) In general terms, the Report (PPAR) is a fair representation of the work carried out by the lender, in this case the Bank and the Borrower, ie the Government of Zambia. The broad comment that this was the first ever attempt to evaluate the hydrocarbon potential is not altogether true because previously, a study was made by the Romanians as well as Dutch Shell Group. Equally, the Geological Survey Department had assembled over a long period, extensive geological data and indeed the first ever work aimed at defining the sedimentary basins w-s that of the Geological Survey. The statement that the loan was cancelled at the request of the borrower in the first paragraph of the Preface is not correct. On the contrary, the Borrower repeatedly requested a review and indeed extension of the loan facility. Even the letter of Hon. Minister of Mines to the Bank written in September 1989 requests the use of the balance sum. It is also incorrect to maintain as the Report does, that until the project was prepared, there was no institution dealing with petroleum resources because there was no expectation of finding oil in Zambia. The Geological Survey Department had the responsibibity to search for mineral deposits under the Mines and Minerals Act 1976. Hydrocarbon ie petroleum is a mineral and Geological Survey did embark on an oil programme in a modest way to begin with, which eventually culminated in the World Bank supported project. Indeed it was the paper titled "Hydrocarbon Potential of Zambia" presented at the UN meeting in the Hague in 1981 that triggered 12 The relationship with the Bank certainly cooled off towards the end and this is attributable to the lack of understanding by some of the senior Bank staff. This aspect is well reflected in the report and the objective appraisal is good and commendable. The success of the project in the early phase is largely a function of purposeful leadership, enthusiasm and the good dialogue between the coordinator of the project and the senior Bank officer responsible for the project. Changes in both these officers by the respective organisations did curtail the pace of ;hievement. It may perhaps be prudent to ensure that the more senior responsible officers on both sides do, not only have tenure of service in their respective roles but remain in close contact. In fact had this been the case it is probable, greater result may have ensued including the full utilisation of the loan. The comment tha* the staffing procedure should have been agreed to between the Government and the Bank and that it should have benefited from the same protection that the Loan Agreement offers to covenants formally negotiated is fully endorsed. Finally, it is reasonably correct to maintain that the main objectives of the loan were achieved, despite the impasse towards the end between the Borrower and the Lender. The training and support facility did prove useful and offers the base to build on. The Bank did provide the catalyst and with continued support, positive results could still ensue. The Bank should not overlook this aspect and future assistance to augment data base to attract further interest by oil companies should be studied especially if the price of oil escalates to over US SO a barrel. It is also recommended that the Bank should review its policy on technical staffing personnel at the Bank so as to give due cognisance to not only the technical understanding of issues but also the developmental and social political aspirations of the recepient country. Yours sincerely, / Nic J. Money Director GEOLOGICAL SURVEY DEPARTMENT