China - Karamay Petroleum Project

Document of The World Bank FOR OFFICLAL USE ONLY Report No. 11121 PROJECT COMPLETION REPORT CHINA KARAMAY PETROLEUM PROJECT ( LOAN 2426-CHA) SEPTEMBER 11, 1992 Industry and Energy Operations Division China and Mongolia Department East Asia and Pacific Regional Office 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.  CURRENCY EQUIVALENTS Currency Unit - Yuan (Y) Appraisal (Sep 1983) $1.0 - Y 1.98 (Feb 1992) $1.0 - Y 5.48 FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES 1 cubic meter (CM) - 35.3 cubic feet (CF) 1 thousand cubic meters (MCM) - 35.3 MCF 1 million cubic meter (MMCM) - 35.3 MMCF 1 billion cubic meter (BCM) - 35.3 BCF 1 thousand cubic meters of natural gas - 9.31 kilocalories 1 ton oil equivalent (TOE) - 10.2 million kilocalories I barrel (bbl) 0.85 SG crude oil - 0.135 tons - 0.159 CM - 42 US gallons 1 kilogram coal equivalent (KGCE) - 0.64 kg oil equivalent (KGOE) ABBREVIATIONS AND ACRONYMS CNOOC China National Offshore Oil Corporation CNPC China National Petroleum Corporation CNTIC China National Technical Import Corporation COCOM Coordination Committee for Multilateral Export Control EOR Enhanced Oil Recovery GOC Government of the People's Republic of China ITC International Tendering Company of CNTIC KOC Karamay Oil Corporation LPEB Liaohe Petroleum Exploration Bureau LPG Liquified Petroleum Gas MIS Management Information System MOF Ministry of Finance MOPI Ministry of Petroleum Industry PCR Project Completion Report SPC State Planning Commission  THE WORLD BANK FOR OMCIAL USE ONLY Washington, DC 20413 U S A. Omce of ir1ctn.CW-CaI Opematmn, lvaluatwHn September 11, 1992 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on China Karamav Petroleum Proiect (Loan 2426-CHA) Attached. for information, is a copy of a report entitled "Project Completion Report on China - Karamay Petroleum Project (Loan 2426-CiA)" prepared by East Asia and Pacific Regional Office. No audit of this project has been made by the Operations Evaluation Department at this time. Attachment | This document has a restricted distribution and may be used by recipients only in the performance of their olilcial duties. Its contents may not otherwise be disclosed without World Bank authorization.   FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT CHINA KARAHAY PETROLEUM PROJECT (Loan 2426-CHA) TABLE OF CONTENTS Page No. Preface .i Evaluation Su-ary ............. .. .. .. .. . ii PART I PROJECT REVIEW FROM BANK'S PERSPECTIVE Project Identity .................. . 1 Background ............... ... . . . . . Project Objectives and Description .1 Project Design and Organization. 2 Project Implementation .......... ... ... . 2 Project Results. 4 Project Sustainability .......... ... ... . 8 Bank's Performance. 8 Borrower's Performance. 9 Project Relationship ............ ..... . 9 Consulting Services. 9 Project Documentation and Data. 9 PART II PROJECT REVIEW FROM BORROWER'S PERSPECTIVE .10 Report of Karamay Oil Corporation .10 Report of Liaohe Petroleum Exploration Bureau .12 PART III STATISTICAL INFORMATION ..... . . . . . . . . . . . . 13 Related Bank Loans .3.... .. . . . . . .. . . . . . 13 Project Timetable .13 Loan Disbursements ............ ..... . . 14 Project Implementation .15 Project Costs and Financing .16 Project Results .17 Status of Covenants ............ ..... . . 18 Use of Bank Resources .......... .... ... . 25 Annex 1 Economic Analysis . t Annex 2 Key Financial Indicators. 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.   - i - PROJECT COMPLETION REPORT CHINA KARAMAY PETROLEUH PROJECT (Loan 2426-CHA) PREFACE This is the Project Completion Report (PCR) for the Karamay Petro- leum Project in China, for which Loan 2426-CHA in the amount of S100.3 million was approved on May 29, 1984. The loan was closed after two extensions on March 31, 1991. On May 26, 1989, an amount of $7 million from the loan was canceled at the request of the Government. The last disbursement was made on July 25, 1991 and a final undisbursed amount of $3.8 million was canceled. The PCR was jointly prepared by the Industry and Energy Operations Division of the China and Mongolia Department of the East Asia and Pacific Regional Office (Preface, Evaluation Summary, Parts I and III), and the Bor- rower (Part II). Preparation of this PCR was started during the Bank's PCR mission in February, 1992, and is based, inter alia, on the Staff Appraisal Report; the Loan and Project Agreements; supervision reports; correspondence between the Bank and the Borrower; and internal Bank memoranda.  'S  - ii - PROJECT COMPLETION REPORT CHINA KARAMAY PETROLEUM PROJECT (Loan 2426-CHA) EVALUATION SUMMARY Obiectives 1. The objectives of the project were: (a) to provide support in expanding the exploration program in the Karamay oil belt and its southern extension; (b) to evaluate the potential of heavy oil in the Karamay and Liaohe oil fields; and (c) to transfer modern technology which would in turn enhance efficiency in both exploration and production. Implementation Experience 2. The project was implemented successfully. Its scope was expanded to include heavy oil production consequent to the success of the pilot schemes. As a result, the project costs increased by 28 percent. Most of the physical components were completed largely on schedule. However, the initial delays in procurement (about two years) led to significant delays in implementation of the various technical assistance and training components. These delays could be attributed to a number of reasons, including lack of experience with Bank procedures, fragmentation of responsibilities among various Chinese agencies and cumbersome internal clearance procedures. Results 3. The project objectives have been substantially met. Specifically, both light oil and heavy oil reserves have been augmented. Oil production which was declining at the inception of the project began to rise with produc- tion at the close of the project being 1.5 times that at the start. An opti- mal thermal recovery scheme for heavy oil is in place. The most satisfying result, however, is that technology transfer in exploration--seismic data acquisition and data processing, reservoir engineering, heavy oil production etc.--has taken place with the cooperation of foreign institutions, consul- tants and service and supply contractors. The Karamay Oil Corporation (KOC) has now a pool of geoscientists and petroleum engineers who have been trained in state-of-the-art technology, who also possess modern equipment, instruments and tools. It is the application of this newly acquired technology that led to the discovery of the additional oil-in-place and its production. Sustainability 4. The significant increases in original oil-in-place during the proj- ect period and the success achieved in recovering heavy oil economically indi- cate that the project will run its full course. Oil production, which was 4.0 million tons at the start of the project, was 5.75 million tons in 1990, and is planned to reach a peak of 6.7 millions in 1995/96 before natural decline  - iii - sets in. As for keeping up with modern technology, the China National Petro- leum Corporation (CNPC) and KOC regularly exchange knowledge and experience with other participanta in the world oil industry. Therefore, it is expected that the economic benefits derived from this project would be sustained (Part I, para. 7.1). Findings and Lessons Learned 5. This was the third Bank-financed petroleum project in China. It followed the Daqing and Zhongyuan projects after about 16 months. But the beneficiary was another unit of CNPC, namely KOC, which is situated in the remote area of Xinjiang province of China. KOC's lack of experience with Bank procedures, together with the continuing inadequacy in interagency coordina- tion within China, resulted in procurement delays as in the case of the other two projects. KOC did not have the authority to procure Bank-financed goods directly, nor was it allowed to process loan disbursement applications directly. KOC had to procure through an authorized agent, the China National Technical Import Corporation (CNTIC), and disbursement applications were cen- trally processed by CNPC, formerly the Ministry of Petroleum and Industry. Delegation of greater authority for direct procurement and filing of disburse- ment applications to the project executing agencies would be desirable. On the Bank's part, project implementation schedules when prepared should provide for a time reserve for unforeseen problems. 6. The Bank played a catalytic role in the transfer of modern technol- ogy to KOC. The Bank assisted KOC in picking the functional areas which needed strengthening and in the designing of the technical assistance program and of the training subcomponent. The Bank's involvement during the procure- ment phase and throughout the project implementation was appreciable. Bank staff assisted in selection of equipment, preparation of terms of reference for studies, interaction with consultants and review of consultant studies. However, in retrospect it appears that one or two studies assigned to consul- tants had a wider scope than was strictly necessary for the purposes of the project. The Bank could have assisted in trimming the scope to the needs and helped to avoid the protracted time consultants took to complete the studies (Part I, para. 8.1).  PROJECT COMPLETION REPORT CHINA KARAMAY PETROLEUH PROJECT (Loan 2426-CHA) Part I. PROJECT REVIEW FROM BANK'S PERSPECTIVE 1. Project Identity Project Name: Karamay Petroleum Project Loan Number : 2426-CHA RVP Unit : East Asia and Pacific Region Country China Sector : Energy Subsector Petroleum 2. Background 2.1 For over three decades until the end of the 1970s, China was remark- ably successful in following a policy of self-reliance in the development of its energy resources. However, the rate of oil and gas discovery started declining in the early 1980a. This adverse trend arose out of several fac- tors. Mainly, the prospective areas were becoming more complex to explore, and exploration and production techniques required updating to add to the reserves/recover a higher proportion of the oil-in-place. State-of-t'^r art technology had to be sought and manpower skills upgraded. Sophistica 1d equipment, instruments and appliances were to be introduced. 2.2 . In the early 1980s, GOC requested the Bank to provide technical assistance to enhance the productivity of Chinese oil companies, firstly by the identification of technological constraints and next, by facilitating effective appraisal and exploitation of hydrocarbon prospects through the selection of technologies which could be adopted rapidly to improve the qual- ity of ongoing exploration and production efforts. 2.3 Karamay was the third project of a series of five Bank-financed petroleum projects in the country. This project has not only augmented t.f light and heavy oil reserves of KOC, resulting in a reversal of a potential decline in production to one of steady increase; it has also provided training for KOC staff in China and abroad. A pool of geoscientists and engineers well versed in modern methods of exploration and production of heavy oil has been created. The project also provided sophisticated equipment, laboratory and tools, which are now being utilized for accelerated exploration and develop- ment in Xinjiang province. 3. Proiect Oblectives and Description 3.1 The objectives of the project were (a) to provide support in expand- ing the exploration program in Karamay oil belt and its southern extension; (b) to evaluate the potential of heavy oil in the Karamay and Liaohe oilfields and to evolve the optimum method of thermal recovery to enhance the production  - 2 - of heavy oil; and (c) to transfer modern technology which would in turn enhance efficiency in both exploration and production. 3.2 The project comprised of (a) exploration and evaluation of light-oil potential in the KOC operating area; (b) evolving the optimum recovery method for heavy oil in KOC and Liaohe areas; and (c) transfer of technology for oil exploration and heavy oil production, which were to be achieved through: (i) consultant studies (geological, reservoir engineering, training, utiliza- tion of South China sea gas and costing); (ii) carrying out of high-resolution and 3D seismic surveys, processing and interpretation; (iii) upgrading of data processing facilities; (iv) acquisition of computer equipment (hardware and software) and other sophisticated oilfield equipment; and, (v) establishing of a center for training of skilled workers and professionals. 4. Proiect Design and Orxanization 4.1 The exploration and appraisal for light oil was designed to progress through successive stages. Conventional, high-resolution and 3D seismic sur- veys would be followed by pinpointed exploration/appraisal/development drill- ing and thereafter more light oil would be produced. For heavy oil, the ongo- ing "huff and puff" pilot scheme of steam injection would be closely examined by consultants and modifications and improvements suggested for incorporation with a view to putting in place an optimal recovery method. The technical assistance component was elaborated for implementation as follows: (a) 2D (conventional and high-resolution) and 3D seismic surveys using modern equip- ment were planned before exploratory and delineation drilling was done, so that the success ratio of finding hydrocarbons could be raised; (b) pilot schemes for recovery of heavy oil were carefully designed using a multitude of data from Karamay and Liaohe and tested for reliability as possible in the laboratory, before field experimentation; (c) all opportunities for training were planned to be availed of, namely suppliers of equipment had to projide training in the operation and maintenance of the equipment, consultants carry- ing out studies had to associate KOC personnel with them, service contractors like the foreign seismic survey parties had to coopt KOC staff in the crews, specific institutional courses in petroleum subjects abroad were to be attended by selected professionals and a training center for skilled workers and professionals was to be organized with assistance from competent consul- tants. Such attention to project designing together with monitoring of the progress contributed to the achievement of all the objectives. 4.2 KOC implemented the project with the assistance of consultants and contractors. It established a project team under the immediate direction of the Deputy General Manager to provide guidance and supervision for the execu- tion of the project. The Liaohe heavy oil component was implemented by Liaohe Petroleum Exploration Bureau (LPEB). 5. Prolect Implementation 5.1 The project was implemented successfully. In addition, the heavy oil component, which according to the original design of the project was lim- ited to evolving the optimum method of recovery of heavy oil, was expanded in scope to include systematic production of heavy oil employing steam injection, incorporating recommendations made in the consultant studies. This involved  - 3 - drilling of several wells to produce heavy oil. As a result, KOC maintained a steady increase both in light and heavy oil production. Delays occurred, how- ever, in procurement and the execution of various technical assistance compo- nents, with the closing date of the loan having to be extended by two years. These delays can be attributed to a number of reasons: (a) a lack of coordi- nation between related agencies--for example, KOC procures through an agent, the International Trading Corporation, disbursements are made by China National Petroleum Corporation (CNPC) and this tripartite allocation of work took time to move in harmony; (b) the slow process of soliciting and evalua- tion of bids; (c) protracted contract negotiations; (d) frequent revision of scope of contractual work and lack of clear understanding between client and consultant regarding contract administration (in the case of the reservoir study); (e) certain suppliers not fulfilling their contractual obligations in time; (f) the export restrictions and delays (of a supplier country) under the procedures of a coordination committee for multilateral export control (COCOM) in issuing export licenses--downgrading of the computers for seismic data pro- cessing to expedite its export had to be done; (g) complications due to fail- ure in following the Bank's guidelines for evaluation of bids (in the case of the training simulator). In future projects, the possibilities of such impe- diments bedeviling procurement should be kept in view in drawing up implemen- tation schedules. 5.2 The deviations in implementation from what was envisaged during appraisal were mainly the following: (a) time slippage by about one to two years in the completion of the different components for reasons explained in the previous paragraph; (b) expansion of the project scope to include produc- tion of heavy oil; (c) of the five studies (geological, reservoir engineering, training curricula and training methods, costing and utilization of South China Gas), the last two were carried out by Chinese experts and not by out- side consultants. The costing study was satisfactory. The South China Gas utilization study, carried out in house by CNOOC, following a request from the Ministry of Energy to the Bank that CNOOC had the competence to make the study and should be so conducted, did not cover overall gas development economics and also omitted end user investments, which the Bank considered to be crucial elements of the study. 5.3 Project Costs. The total financing required (including front-end fee of $0.25 million) amounted to $965 million equivalent, as compared to the appraisal estimate of $754 million equivalent (Table 5A in Part III).1/ The overrun is largely explained by the expansion in the scope of the project to include production of heavy oil through drilling of injection/production wells, and import of casings, tubing and other equipment and material for this purpose. Ninety delineation and 1,126 development wells for production of 1/ KOC has calculated the actual project cost in US$ equivalent at $743.09 million in Part II or as within the "budget" (para. 3.2 of Part II). This is due to KOC accumulating local currency costs to the end of 1991 and converting these costs to USS at the exchange rate as at the end of 1991. The PCR mission has taken th. local currency costs, year by year, and converted the yearly costs to USS, using each year's exchange rate. The exchange rate changed by gradual steps from $1 - Y 1.98 in 1984 to Sl - Y 5.24 in 1991.  heavy oil were drilled during the period 1985-89. The appraisal report had estimated that 160 wells would be drilled for delineation of heavy oil in Karamay. All the wells were shallow, going to a depth of about 600 meters. The other reason for cost overrun was that the foreign seismic crews were awarded additional survey work and an extension of contract by two years, resulting in more line kilometers being shot and more 3D coverage being car- ried out than was envisaged at first. On the other hand, savings (partly offsetting the increase in survey costs) in seismic data processing were achieved, due to more work being done at the data processing center than was estimated at appraisal. The total project cost increased by about 28 percent (36 percent in local costs and 14 percent in foreign exchange). 5.4 Proiect Financing. A comparison of actual project financing with appraisal estimates is set out in Table 5A, Part III. Possible cofinancing with export credits did not materialize. Instead, tubular goods were cen- trally procured by MOPI and resold to various oilfields in local currency. The financing requirements for all the local currency were met by KOC's own resources. 5.5 Disbursement. A comparison of actual disbursements with appraisal estimates is presented in Table 3, Part III. As noted earlier, procurement and related disbursements were delayed and the closing date was extended by two years. Actual costs of imported goods and services financed by the Bank were close to the appraisal estimates; the Bank loan disbursements constituted 89.5 percent of the approved loan of $100.3 million. In May 1989, on a request from GOC, the Bank agreed to cancel $7.0 million of the loan, repre- senting the allocation for purchase of certain equipment which was dropped from the foreign purchase list. On closing of the loan, an undisbursed amount of $3.8 million was canceled. 5.6 Loan Allocation. The original and actual loan allocation is shown in Table 5B, Part III. Unallocated amounts ($13.8 million) were largely real- located to equipment and seismic surveys. 6. Prolect Results 6.1 Proiect Oblectives. The project objectives have been substantially achieved. Without the project, it is assumed that the consequences, in the absence of any other action by COC/KOC, would have been: (a) light oil pro- duction would have declined from 4 million tons in 1984 to about 2.9 million tons in 1990 with a further reduction to about 1.4 million tons in 2004; (b) heavy oil production would have remained insignificant; and (c) KOC per- sonnel would not have been trained and would not have applied modern technol- ogy in the areas where opportunities were opened up to them under the project, nor would KOC have acquired relevant modern equipment. The project resulted in the following: (a) seismic surveys, conventional, high-resolution and 3D, were done using modern equipment and techniques, similarly in data processing leading to release of precise locations for exploratory/appraisal drilling and achievement of a success ratio of I in 3; (b) in sequel, more light oil as well as heavy oil reserves were discovered and produced, with light oil pro- duction maintained at or above 4 million tons per annum (para. 6.3) and heavy oil production increasing from almost nothing to about 25 percent of total oil production in 1990; (c) in respect of heavy oil, an optimum method for recov-  -5- ery through two-stage injection of steam was proved (huff and puff followed by steam drive); (d) KOC professional and technical staff were trained in modern technology in many areas of exploration, reservoir analysis and oil produc- tion; and (e) KOC acquired relevant modern equipment, tools and instruments. At Liaohe, however, while a design for a heavy oil pilot has been prepared by consultants, and LPEB staff trained in modern heavy oil technology, the eco- nomics are not in favor of heavy oil production under the prevailing world prices for crude oil. The details of the project results are discussed below. 6.2 Seismic Data Acquisition and Processing. The highlights were (a) the effective interaction of KOC personnel with three foreign seismic data acquisition crews; and (b) the installing of modern data processing equipment, the operation of which KOC personnel have become proficient. The project has enabled KOC seismic crews to carry out surveys at the edge of Junggar basin, which was not technically feasible earlier. The productivity of KOC crews has come up to international levels thanks to the modern seismographs, new trans- portation and ancillary equipment. The refurbished data processing center, with its state-of-the-art trained geoscientists, operates at 95 percent avail- ability and carries out, besides normal processing of data, 3D processing and special processing, all at a high-quality standard. Interpretation of the more detailed and precise data in the basins under KOC control has indicated that oil in place, being proved by drilling, is likely to be thrice the ear- lier estimates taking into account the deeper oil-bearing structures and iso- lated potential oil sands. 6.3 Exploration/Development Drilling. In all, 370 exploration an! development wells were planned for light oil under the project. HoweverT, KOC drilled 201 exploration/appraisal and 500 development wells (by March .989). KOC adjusted the drilling plans in various areas upon review of the explora- tion/appraisal results. Consequently, drilling was curtailed in Wuerhe Hungchiba area, and major exploration/development was concentrated in Hangshanzui--Chepaize and Karamay--Baiqukuan areas to maintain/improve light oil production. Annual light oil Rroduction which would have declined from 3.98 million tons in 1984 to 2.93 million tons in 1990 without the proiect, stayed around an average of 4.78 million tons during 1985-90 due to the proi- ect. Nevertheless, between 1991 and 1996 the median production is placed at 4.4 million tons per annum, and thereafter a slow decline to 2.2 million tons by the year 2000 is expected. With regard to heavy oil, it has been noted earlier that 90 exploration/delineation wells and 1,126 development wells were drilled against the appraisal estimate of 160 exploration/delineation wells. Heavy oil production commenced at 20,000 tons in 1984. By steady steps it rose to 1.44 million tons in 1990. By the year 2000, the production is expected to reach 2.68 million tons involving further investments beyond the project investments. 6.4 Heavy Oil Pilots. KOC had designed its own pilot before the project and had been experimenting with it in one production district. Under the project, foreign consultants advised on the design and construction of the surface facilities and KOC adopted most of the recommendations, appreciating the technical and cost advantages. The consultants had also prepared the design of a thermal recovery project to be tried out in one of the blocks of this production district. This was an expansion of the "huff and puff" for steam injection into a two-stage technique of "huff and puff" and a steam  - 6 - drive. KOC has adopted it. For Fenchang in another production district, the consultants had prepared a techno-economic study for development and proces- sing of extra heavy oil. It is not economic to develop this area at present. 6.5 With regard to Liaohe comDonent, the consultant had designed a heavy oil pilot and had imparted training to a number of technical staff of Liaohe Petroleum Exploration Bureau (LPEB), abroad and in China. Thus, the transfer of technology took place successfully. However, the economic evaluation of the pilot showed that it would not be viable to invest in a heavy oil pilot in the designated area under the present prices for heavy oil in the world mar- ket. 6.6 Technical Assistance. This comprised five studies, training and establishment of a training center: (a) The geological study was undertaken for a comprehensive understanding of the structural geology of the Junggar basin. KOC staff generally found that their own understanding of the basin was confirmed by the consultants. But the benefits to KOC were primarily in learning the consultant's research methods and methods of map compiling. (b) The reservoir study was aimed at successfully developing the tight con- glomerate Wuerhe reservoir. The recommendations of the consultants are being implemented and production decline which would have been about 90,000 tons annually, from the old fields in the reservoir is presently controlled at 15,000 tons annually. ROC engineers who participated in the study by the con- sultants were exposed to modern technology in geological modelling, well log analysis, well test analysis and reservoir simulation. (c) The costing study was carried out by Chinese experts from other agencies and institutions. It is a good study with several recommendations on costing of discrete opera- tions, of light oil and heavy oil output separately, proper allocation of com- mon costs, reconciliation with finance accounts of costs from costing data, etc. KOC has accepted the recommendations. (d) The training study by con- sultants was to devise the training curricula for skilled workers and profes- sionals of KOC. The teachers were trained abroad, who in turn trained the local instructors. They conduct seven different types of courses at the training center. During the project period, about 1,900 skilled workers and professionals were trained. The training simulator obtained under the proj- ect, however, has not been commissioned due to a contractual snag under reso- lution, with the consequence that this sophisticated training aid is yet to benefit KOC trainees. Had the simulator been available as a training acces- sory, the quality of the training would have been enhanced. (e) The South China Gas Utilization study was carried out by CNOOC as mentioned in para. 5.2. 6.7 The overseas training part of technical assistance was effectively implemented. Thirty-three technical personnel were trained in various petro- leum subjects, in institutions abroad. Other opportunities which were availed of for training in and out of the country have been discussed in the forego- ing. 6.8 The computer center in Karamay was equipped with modern hardware and software under this project to provide for the following: (a) database man- agement for oilfield development plans based on reservoir simulation and risk analysis; (b) reservoir engineering; and (c) storing and processing of admin- istrative data.  7- Economic Evaluation 6.9 The quantifiable benefits of the project are derived from the addi- tional production of both light crude oil and heavy crude oil by virtue of the accretion to the recoverable reserves made possible by the project. At appraisal no economic rate of return (ERR) was indicated; however the pros- pects for new discoveries of light oil and the heavy oil pilot project proving economic were rated high. In the event, as Annex 1 brings out, the project will have an economic rate of return of 31 percent, which is good. 6.10 The ERR has been based on incremental volume of production of oil and the additional investment and operating costs under the project as well as needed to sustain the incremental production in the future. KOC has main- tained data on the cost of producing heavy oil, which commenced at 20,000 tons of output in 1984 and has since risen (in 1991) to 1.64 million tons/year. In 1990, the cost of producing heavy oil was about $53/ton compared to a value of about $95/ton at the field. In that year, light oil cost $33/ton to produce compared to a value of about $110/ton at the field. Financial Performance 6.11 KOC Finances. Salient features of KOC's finances (present and past) are summarized in Annex 2. During 1984-90, KOC had a production growth of 4.5 percent annually, but annual operating costs registered an average increase of 19 percent, outpacing the former by a larger margin than was anticipated at appraisal. This was due to heavy oil production, the ratio of which to total oil production changed from 0.5 percent in 1984 to 25 percent in 1990. KOC's financial performance in this period was however good, the financial ratios were satisfactory and the internal cash generation sufficient to cover over 30 percent of capital investments and maintenance. GOC has recently raised the prices for crude oil under the two-tier formula in force from 1981, the upper tier of which applicable to production above 3.64 mn..llion tons in a year at about $95/ton currently is not too short of the interna- tional parity price as net backed to the field (see para. 6.10). The lower tier at about $40/ton currently applicable up to 3.64 million tons remains far short of such parity. In 1992 and beyond, this price will not adequately cover the cost of production of the first portion of 3.64 million tons. With the profits accruing in respect of the portion of the production above 3.64 million tons, KOC would make overall profits, but sharp drops in internal cash generation will occur, specially after 1995/96 when total oil production is expected to peak at 6.7 million tons. GOC, it is presumed, will in due time make necessary revisions in the administered prices. KOC for its part should optimize costs of operation. Norms and targets exist in all varieties of operation, from exploration to production. A review of these norms and tar- gets with a view to tightening them and also taking on more profit-making activities, such as bidding for contracts in other parts of China or even abroad, is recommended. 6.12 The conditionalities for this project did not include any tradi- tional financial performance covenant. Instead, the Bank's objective to pro- mote prudent financial management was achieved through KOC's compliance with a covenant which required the extension of the financial planning horizon and furnishing the Bank with a five-year rolling plan and its annual review.  - 8 - Further, ROC fulfilled its assurance that an evaluation of its costing would be undertaken with the assistance of consultants (para. 6.6(iii)]. 6.13 Proiect Finances. Financial projections made in respect of the project as such (Annex 2) show that if present prices remain unchanged in con- stant terms, the financial rate of return to KOC will be 11 percent, which is minimally acceptable. No estimate of the return was made at appraisal. Pri- marily, the low return is due to the higher costs of producing heavy oil, the proportion of which in the total additional oil will keep rising; at the same time the decline in light oil production which will set in after 1995/96 will make the unit cost of its production also high. It will be recalled that the project economic rate of return is estimated at 31 percent, which indicates that COC's share of the net benefits of the project will be far larger than KOC's. I Environmental Impact and Safety 6.14 KOC has conducted its seismic, drilling and production operations in line with modern industrial practices. It has paid due attention to environ- mental and safety considerations. The oil and liquid wastes were collected and treated. Since most of the operations were conducted in isolated barren areas, the ecological hazards were minimized. Prior to the project, the ' safety procedures at Karamay were not satisfactory. However, the recommenda- tions made under the safety study for the Daqing and Zhongyuan projects and the heavy oil study were implemented by KOC, improving significantly the safety standards. 7. Proiect Sustainability 7.1 During the project period 1985-90, original light oil-in-place increased by 151 million tons to reach 195 million tons at the end of 1990. Original heavy oil-in-place went up from zero to 110.2 million tons at the end of 1990. In 1990 incremental production due to the project, of light and heavy oil, accounted for 2.82 million tons out of a total production of 5.75 million tons. The planned production profile until 2004 shows that while the total production would peak at about 6.7 million tons in 1995/96 and decline to about 5.3 million tons by 2004, incremental production due to the project and subsequent investments of a lesser order to sustain the gains in produc- tion, would rise to about 4 million tons by 1995/96 and then gradually decline. The production increases have thus been significant until now and would tend to remain so over the next 10 to 12 years assuring sustainability of the project. The other characteristic of the project, the technical upgrading of KOC, would require efforts by KOC to maintain contact with the outside world for exchange of technical knowledge and experience and acquiring of useful new generation equipment to further improve its performance in the future. 8. Bank's Performance 8.1 The Bank played a catalytic role in the transfer of modern technol- ogy and institution building. Bank assisted KOC in picking the functional areas which needed strengthening and in the designing of the technical assis- tance program and of the training subcomponent. The Bank's involvement during  the procurement phase and through project implementation was appreciable. Bank staff assisted KOC in selection of equipment, observance of procurement procedures, preparation of terms of reference for various studies, review of consultant studies, and overall interaction with consultants. The interaction with the consultant engaged to propose optimum methods for recovery of heavy oil enabled the Bank to advise KOC to take up regular production of heavy oil, appropriately expanding the scope of the project to include such production. As noted in earlier paragraphs, heavy oil has become an important product of KOC for sustaining its economic success. 8.2 China has appreciated the role of the Bank in all the five energy (oil and gas) projects approved by the Bank between 1983 and 1986. Bank involvement gave it a window to modern technology and the practical means of acquiring it. With their familiarity with technical progress in different aspects and different countries, of hydrocarbon exploration, development and production and with the know-how on how to get the best consultants, contrac- tors and suppliers of sophisticated equipment, Bank staff were in a unique position to assist China in the fulfillment of its longing to catch up on modernization. 9. Borrower's Performance 9.1 In spite of delays in procurement, the physical components were largely completed well within two years of the original schedule. In KOC, the coordination and monitoring of project implementation was satisfactory. Proj- ect expenditure was kept under control through periodic reviews of physical and financial progress. KOC staff were highly motivated to absorb new skills and use new technology. The sophisticated equipment imported through the project is being effectively utilized. 10. Proiect Relationship 10.1 The Bank and KOC developed a good working relationship and a spirit of cooperation prevailed throughout the course of project preparation and implementation. 11. Consultant Services 11.1 The consultants in general performed well and their reports were professionally prepared to the satisfaction of the client. Moreover, the consultants readily agreed to work with KOC personnel and pass on expertise in research and analytical methods. 12. Proiect Documentation and Data 12.1 Both the Staff Appraisal Report and loan documents provided an ade- quate framework for project implementation. Supervision reports provided an adequate review of the progress of the project. However, many supervision missions did not include a Financial Analyst and gaps in financial information and the financial progress of the project prevailed. KOC's own contribution to the PCR and its ready supply of documents during the PCR Mission went a long way in making the PCR as complete as possible.  PROJECT COMPLETION REPORT CHINA KARALAY PETROLEUM PROJECT (Loan 2426-CHA) Part II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE A. Report of Karamay Oil Corporation 2/ 1. Prolect Achievements 1.1 KOC fully completed the exploration and development ororam. With the use of advanced technology and modern equipment, KOC found 264 million tons (Mt) of oil-in-place (151 Mt light and 113 Mt heavy oil). In 1990, oil production was 5.75 Mt tons or 115 percent of projection for the year. 1.2 The foreign seismic survey contract was extended by two years until April 1989 and the three foreign crews shot 17,334 km, and also performed 3D seismic survey. The results provided better data for enlarging the reservoir areas and KOC's own quality of seismic survey work was enhanced. 1.3 As for drilling during 1985-89, 291 exploration wells were drilled-- 201 for light oil discovery and 90 for heavy oil discovery. Sixty-eight per- cent of the wells had commercial zones of oil. 1.4 The seismic data processing center at Urumchi was upgraded with the addition of a Cyber 855S computer. The center processed 193,196 km of stan- dard-line km and 463 km2 of 3D data. The results enabled an efficient drill- ing program and reservoir evaluation. The imported Sperry 1100172 computer located in Karamay is assisting in storina and processing of oil field techni- cal data. It has, by enabling a better understanding of the reservoir, made contributions in raising oil production. 1.5 The consultants completed the study for the design and test of proj- ects for thermal recovery of heavy oil in Karamay. By 1989, the heavy oil pilot testing was completed. Development wells drilled for heavy oil and recovery through steam injection using 36 steam generators helped to produce good quantities of heavy oil going up to 1.44 mt in 1990. 1.6 The consultants' work on the conceptual process design of surface facilities for commercial development of heavy oil in District No. 9, design and study for the thermal recovery of heavy oil in District No. 9 Block 8 and feasibility study for development and processin1 ef Vevvy oil in Fengchang area were useful. The last is to be implemented. 1.7 The consultants' training program in Canada for 14 KOC staff is commended. 1.8 The consultants did a good job in respect of the traininx study and establishment of the training center for training skilled workers and Profes- sionalrs. Comprehensive teaching material for seven courses (drilling, produc- tion, downhole, mud, cementation well testing and logging) were provided. Six professional teachers trained by the Council are qualified to give lectures on 2/ Summarized from a comprehensive report prepared by KOC. A copy of the report is in the project file.  the seven courses. The consultants provided a useful list of equipment and instruments for the center. About 1,000 skilled workers and professionals are being trained each year at the center. 1.9 Thirty-three professionals were trained in academic institutions abroad--two obtained PhDs, 1 Masters, and 30 others instructions in petroleum subjects. 1.10 Studies as required in the Project Agreement were undertaken. The geological study by consultants was not remarkable for its findings, but KOC staff got an insight into the research and organization methods of the consul- tant. The consultants carried out the reservoir study. There were some issues about the scope of the work which were resolved. The results of the study were appreciated by KOC as well as the incidental training of KOC staff. Costing study was done by domestic consultants who, it was felt, would have a better grasp of the financial system in China. KOC agrees that the lacunas pointed out exist and need remedying. (The training study is discussed in para. 1.8. The South China Sea Gas Utilization study was done by CNOOC.) 1.11 Equipment procurement proceeded without undue problems except for claim adjustments on completion of contracts and the one case of an unful- filled contract for the training simulator. Six contracts for technical ser- vices and 37 contracts for purchases were handled. Seventy-two percent of the loan amount was utilized in these contracts. ICB procedures were applied to 56 percent of the loan amount. 2. Suggestions from KOC 2.1 Procurement procedures need to be streamlined and the functions and responsibilities of agencies involved in procurement clearly defined lest schedules are not adhered to. 2.2 Responsible agencies should give prior assurances about conforming to procurement schedules, accept and work to the time limits for processing each phase. 2.3 Standard procurement documents for different modes of procurement should be prescribed. 3. Role of World Bank and KOC 3.1 Bank staff made significant contributions in the light of inexperi- ence of KOC in the implementation of the project. Assistance was given in expediting decision-making, preparing terms of reference for consultants, execution of the thermal recovery of heavy oil, review of technical specifica- tions, evaluation of bids, and enhancement of procurement efficiency. 3.2 KOC was responsible for implementation of the project. A project team under the Deputy General Manager provided guidance and coordination. Specific assignments of tasks to concerned departments was made. A technical cooperation department for purchase of equipment was nominated. KOC compiled TORs, procurement documents, evaluation reports and project progress reports. CNPC authorized KOC to have direct contact with the World Bank in procurement/  - 12 - implementation activities.3/ The project was implemented on schedule and within the budget. All covenants were observed. 3.3 KOC had developed an effective relationship with the Bank. B. Report of Liaohe Petroleum Exploration Bureau (LPEB) 4/ 3.4 Project Achievement. Project objectives were all basically met. Two wells were picked, in consultation with the consultants for coring. Core, water and oil samples were flown to Canada. Petrophysical, geological, reser- voir engineering, drilling and completion technology studies were carried out by consultants associating LPEB experts. A thermal recovery (steam injection) technology and a technology to monitor it were devised. Conceptual design of surface gathering and transportation was prepared. A pilot block of 1 km2 was selected to verify the results of the study. However, further implementation was deferred on economic considerations. 3.5 Proiect Economics. Eighty-seven wells would have been drilled in the 1 km2 area selected. An investment of $162 million would have been made. But sale of oil, gas and condensate which would have been produced would have earned $120 million at world parity prices. On the face of it, it was not advisable to launch the field experimental project. 3.6 Proiect Delay. The study had a one-year delay for various rea- sons.5/ 3.7 Experience Gained. LPEB is setting up heavy oil pilots using ther- mal techniques to improve heavy oil production from Shugong field (not part of the Bank project, but using experience gained in designing a pilot for Liaohe). LPEB benefited from the close working with the Canadian consultant and drew a number of lessons for administering such consultancy contracts more efficiently in future. 3/ Apparently, this was for follow-up after the International Trading Corpo- ration initiated procurement on behalf of KOC and had placed the orders; also, disbursements applications were processed by CNPC.  - 13 - PROJECT COHPLETION REPORT CHINA KARAMAT PETROLEUM PROJECT (Loan 2426-CiA) PART III. STATISTICAL INPORMATION Table 1; RELATED BANK LOANS Year of Loan Title Purpose approval Status Comments Zhongyuan-Wenliu Petroleum ex- 1983 Satisfactory Closing Date Petroleum Proj- ploration/ Original: 12/31186 ect (Ln. 2252) development, TA Actual : 12/31/90 and training Daqing Oilfield- Reservoir 1983 Satisfactory Closing Date Grotaiza Reser- Development TA Original: 06/30/86 voir Development and Training Actual : 06/30/90 Project (Ln. 2231) Weiyuan Gas Gas Field re- 1985 Satisfactory Closing Date Field Technical habilitation TA Original: 06/30/90 Assistance Proj- and Training Latest estimate: ect (Ln. 2580) 06/30/92 Liaodong Bay Gas Field 1986 Completed Loan closed on Petroleum Proj- appraisal, TA Satisfactorily 12/31/89 (as orig- ect (Ln. 2708) and Training inally scheduled) Table 2: PROJECT TIMETABLE Item Actual Date Identification Mission May 2, 1983 Appraisal Mission September 15, 1983 Loan Negotiations April 16, 1984 Board Approval May 29, 1984 Loan Signature June 25, 1984 Loan Effectiveness September 25, 1984 Loan Completion March 31, 1991  - 14- Table 3: LOAN DISBURSEMENTS Cumulative Estimated and Actual Disbursements ($ million) Bank FY 85 86 -87 88 89 90 91 Appraisal estimate 8.0 40.0 94.0 100.3 100.3 100.3 100.3 Actual 4.3 29.1 40.7 65.3 77.9 86.1 89.5 Actual as % of estimate 53.8 72.8 43.3 65.1 77.7 85.8 89.2 Date of final disbursement: July 25, 1991  - 15 - Table 4: PROJECT IMPLEMENTATION Estimated Completion Date Appraisal Project Components estimate Actual/PCR estimate Months of Delay/a A. Karamay 1. Exploration Seismic field acquisition June 1986 Completed April 1987 10 months Seismic data processing December 1986 Completed June 1988 18 months Drilling of exploration and delineation wells December 1988 Completed December 1989 12 months 2. Heavy Oil Feasibility and design December 1984 Completed March 1988 39 months Field pilot tests June 1989 Completed December 1990 18 months 3. Accuisition of Equipment Tender document and bid analysis December 1987 Completed July 1989 19 months Receipt and installation December 1988 Completed June 1990 18 months 4. Studies Heavy oil study December 1987 Completed March 1988 3 months Training study December 1987 Completed July 1988 7 months Geological study December 1987 Completed September 1988 9 months Reservoir study December 1987 Completed January 1991 49 months /b Cost Study December 1988 Completed October 1987 10 months earlier 5. Trainina Establishment of Training Center December 1985 Completed September 1989 45 mcr!:i /c Training of Professionals December 1987 Completed December 1990 36 monitis B. Liaohe Heavy Oil Pilot 1. Heavy oil study and design December 1984 Completed January 1990 73 months /d 2. Heavy oil pilot June 1989 Canceled Canceled /a The initial lag from appraised estimate were caused by the delays in (a) the procurement process leading to the signing of the finalized contracts, and (b) implementation of the contracts. Overall, the appraisal estimate vas too optimistic. Lb Reservoir Study. This study was delayed by the reasons given in para. 5.1. Basically, KOC modified the scope of work and the consultants were delayed in finalizing the repo t. c Trainin . No delays occurred during the contract execution. /d Liaohe Heavy Oil Stud. There were initial delays, as discussed above. The contract wft signed in January 1988, about three years behind the appraisal estimate.  - 16 - Table 5: PROJECT COSTS AND FINANCING A. Project Cost. Aporateal gEtiat n YnM n ctual m on 1xc Onge Total Locl Exchange oreign Local chng Totaal ocal TEhang Total Local Exchange rotal Local Eachange Total Seisic Surveys 20.0 24.0 44.0 39.6 47.3 67.1 52.26 26.42 80.66 205.22 93.2$ 300.50 Seismic data processing *.0 6.0 16.0 15.9 15.6 31.6 31.33 3.65 14.96 44.50 32.04 96.34 Exploration and delineation well 298.0 132.0 430.0 390.0 261.4 651.4 396.67 178.00 374.67 1,557.62 699.04 2,256.66 Heavy oil pilota3. 5 3 1l. 17.0 10.9 22.8 33.7 3.07 8.59 13.66 12.04 *3.00 57.04 Supporting facilitia and arvic 2.0 10.5 32.3 9.9 20.6 24.7 101.23 *5.00 146.23 397.57 176.72 574.29 Imported * uipmnt 6.0 27.0 33.0 11.9 53.5 65.4 65-.3 43.34 128.52 334.52 232.90 567.42 Training of technical assietance 2.0 6.0 8.0 3.9 11.9 15.8 4.60 3.26 7.86 13.06 17.90 35.96 Total base Cost 341.5 239.0 560.5 676.0 433.7 1.109.7 Physical contingencies 34.0 21.0 55.0 67.3 41.6 108.9 Price contingencies 68.5 33.0 101.5 135.6 65.3 200.9 Total Proiect Cost 444.0 273.0 717.0 079.0 540.6 1,419.5 654.34 310.26 964.60 2,569.72 1 316.89 3,988.61 Front-and fo 0.3 0.3 - 0.6 0.6 - 0.25 0.25 - 1.60 1.60 Charges on use of foreign exchange 36.2 36.2 71.7 - 71.7 - - - - - - Total Finance 460.2 273.3 753.5 950.7 541.2 1.491.7 654.34 310.51 964.65 2.569.72 1320.49 3.890.21 In nck Pln 460.2 - 460.2 950.7 - 950.7 634.34 223.00 677.34 2,569.72 675.77 3,445.49 Sunslier credit or GOS 173.0 173.0 - 342.6 342.6 - - - - - - isa - 100.3 100.3 - 196.6 196.6 - 67.51 67.51 - 444.72 444.72 Total 480.2 273.3 753.5 950.7 541.2 1,491.9 654.34 310.51 964.65 2,569.72 1,320.49 3,990.21 B. Proiect Financing: IBRD Loan Allocation Planned (Loan Agreement) Actual $ million Z $ million Z Karamay Seismic surveys and interpretation 18.4 100 28.42 31.8 Seismic data 7.7 100 3.65 4.1 Heavy oil studies pilot 6.0 100 8.59 9.6 Equipment for exploration and support facilities 38.5 100 33.34 37.2 Computer center 5.0 100 8.54 9.5 Laboratories 1.1 100 1.46 1.6 Training center 1.65 100 0.73 0.8 Overseas training 0.5 100 0.00 0.0 Consultants services 3.3 100 2.53 2.8 Liaohe Heavy oil study/pilot 3.3 100 1.99 2.2 Consultant's services 0.8 100 0.00 0.0 Others Fee 0.25 100 0.25 0.3 Unallocated 13.8 100 0.00 0.0 Total IBRD 100.3 100 89.50 100.0  _ 17 - Table 6: PROJECT RESULTS A. Economic Impact Appraisal Actual Economic Rate of Return Not Calculated 31% B. Financial Impact Appraisal Actual Financial Rate of Return Not Calculated 11% C. Studies Studies Status Impact of Study Heavy oil study Completed Transfer of modern technology. Improved heavy oil production by 8 times. Training study Completed The Study has been a successful vehicle for transfer of modern technology. It has enhanced capacity/capability of training center, students and teachers. Geological study Completed Improved comprehension of structural geology of Junggar Basin; KOC's engineers learned modern research methods and map compiling methods. Reservoir study Completed Improved production and arrested decline from 90,000 tons per annum to 15,000 tons per annum. Cost study Completed Strengthened financial management and improved cost control. Heavy Oil Study Completed Improved comprehension of heavy Liaohe oil reserves and heavy oil production methods.  - 18 _ Table 7: STATUS OF COVENANTS Section Covenant Status Prolect Agreement Section 2.08 KOC shall (a) carry out under terms of refer- Complied ence satisfactory to the Bank, a study of reservoir engineering in Wuerhe area; (b) review the results of such study with the Bank; and (c) agree with the Bank on an action plan. Section 2.09 KOC shall (a) carry out under terms of refer- Complied ence satisfactory to the Bank, a regional sedimentological and structural study to investigate the composition and distribution of reservoir bodies; (b) review the results of such study with the Bank; and (c) agree with the Bank on the consequent course of action. Section 2.10 KOC shall: (a) under terms of reference Complied satisfactory tb the Bank, carry out the study for the pilot projects under Part B (i) and the techno-economic study under Part B (ii) of the Project, and shall review the findings of such studies with the Bank: (i) with respect to the study on the design of the pilot projects; and (ii) with respect to the techno-economic study; and (b) agree with the Bank on the consequent action plan. Section 2.11 KOC shall carry out a study under terms of Complied reference satisfactory to the Bank, of KOC's costing. Section 2.12 KOC shall carry out under terms of reference Complied satisfactory to the Bank, a design of train- ing methods for skilled workers and shall review the findings and agree with the Bank on the consequent action plan. The consul- tants to assist KOC in carrying out such a design shall be appointed.  - 19 - Table 7: (cont'd) Section Covenant Status Section 2.13 KOC shall exchange views periodically with Complied the Bank on the results of the seismic pro- gram under Part A of the Project at Wuerhe- Hungchiba and Hongshanzui-Chepaizi areas, and agree with the Bank on the consequent impact on the design of the exploration program. Section 2.14 KOC shall review periodically with the Bank Complied the exploration program of KOC for the Proj- ect. Loan Agreement Section 3.01 (a) The Borrower declares its commitment to Complied the objectives of the Project as set forth in Schedule 2 to this Agreement, and, to this end, shall carry out Part E of the Project through MOPI with due diligence and efficien- cy and in conformity with appropriate admin- istrative, financial, engineering and petro- leum industry practices, and shall provide, promptly as needed, the funds, facilities, services and other resources required for the purpose. (b) Without any limitation or restriction Complied upon any of its other obligations under the Loan Agreement, the Borrower shall cause KOC to perform in accordance with the provisions of the Project Agreement all the obligations of KOC therein set forth, shall take or cause to be taken all action, including the provi- sion of funds, facilities, services and other resources, necessary or appropriate to enable KOC to perform such obligations, and shall not take or permit to be taken any action which would prevent or interfere with such performance.  - 20 - Table 7: (cont'd) Section Covenant Status (c) The Borrower shall relend the equivalent Complied of $96,200,000 out of the proceeds of the Loan to KOC under a subsidiary loan agreement to be entered into between the Borrower and KOC, under terms and conditions which shall have been approved by the Bank, which shall include, inter alia, same interest rate as specified in Section 2.07 of this Agreement, and a repayment period not exceeding 20 years. The Borrower shall bear the foreign exchange risk. (d) The Borrower shall exercise its rights Complied. under the Subsidiary Loan Agreement in such manner as to protect the interests of the Borrower and the Bank and to accomplish the purposes of the Loan, and, except as the Bank shall otherwise agree, the Borrower shall not assign, amend, abrogate or waive the Subsid- iary Loan Agreement or nay provision thereof. Section 3.02 (a) In order to assist the Borrower in Complied carrying out the studies under Part E of the Project, the Borrower shall employ consul- tants and experts as necessary whose selec- tion, qualifications, experience and terms and conditions of employment shall be satis- factory to the Bank, in accordance with prin- ciples and procedures described in the "Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency" published by the Bank in August 1981.  - 21 - Table 7: (cont'd) Section Covenant Status (b) The Borrower shall complete the studies Complied and review the findings with the Bank: (a) by December 31, 1985 with respect to the gas utilization study under Part E (i) of the Project; (b) by March 31, 1985 with respect to the study on the design of the pilot projects for heavy oil recovery un- der Part E (ii) of the Project; and (c) by December 31, 1986 with respect to the techno-economic study under Part E (iii) of the Project. (c) Thereafter, the Borrower shall agree Complied with the Bank on the consequent action plan based on the studies referred to in (b) above. Section 3.03 (a) The Borrower undertakes to insure, or Complied make adequate provision for the insurance ot, the imported goods to be financed out of the proceeds of the Loan against hazards incident to the acquisition, transportation and deliv- ery thereof to the place of use or installa- tion, and for such insurance any indemnity shall be payable in a currency freely usable by the Borrower to replace or repair such goods. (b) The Borrower shall cause all goods and Complied services financed out of the proceeds of the Loan to be used exclusively for the purposes of the Project. Section 3.04 (a) The Borrower shall furnish to the Bank, Complied promptly upon their preparation, the plans, specifications, reports, contract documents and work and procurement schedules for Part E of the Project, and any material modifica- tions thereof or additions thereto, in such detail as the Bank shall reasonably request.  - 22 - Table 7: (cont'd) Section Covenant Status (b) The Borrower shall: (i) maintain rec- Complied ords and procedures adequate to record and monitor the progress for Part E of the Proj- ect (including its cost and the benefits to be derived from it), to identify the goods and services financed out of the proceeds of the Loan related thereto, and to disclose their use in such Part of the Project; (ii) enable the Bank's representatives to visit the facilities and works sites included in Part E of the Project and to examine the goods financed out of the proceeds of the Loan related thereto and any relevant records and documents; and (iii) furnish to the bank at regular intervals all such information as the Bank shall reasonably request concerning Part E of the Project, its cost and, where appropriate, the benefits to be derived from it, the expenditure of the proceeds of the Loan related thereto and the goods and ser- vices financed out of such proceeds. (c) Upon the award by the Borrower of any Complied contract for goods, works or services to be financed out of the proceeds of the Loan, the Bank may publish a description thereof, the name and nationality of the part to whom the contract was awarded financed out of such price. (d) Promptly after completion of the Proj- Complied ect, but in any event not later than six months after the Closing Date or such later date as may be agreed for this purpose be- tween the Borrower and the Bank, the Borrow- er, with the Assistance of KOC, shall prepare and furnish to the Bank a report, of such scope and in such detail as the Bank shall reasonably request, on the execution and initial operation of the Project, its cost and the benefits derived and to be derived from it, the performance by the Borrower and the Bank of their respective obligations under the Loan Agreement and the accomplish- ment of the purposes of the Loan.  - 23 - Table 7: (cont'd) Section Covenant Status Section 4.01 (a) KOC shall maintain records and accounts Complied adequate to reflect in accordance with con- sistently maintained appropriate accounting practices its operations and financial condi- tion, including, without limitation to the foregoing, separate accounts reflecting all expenditures on account of which withdrawals are requested from the Loan Account on the basis of statements of expenditures. (b) KOC shall retain, until one year aftet Complied the Closing Date, all records (contracts, orders, invoices, bills, receipts and other documents) evidencing the expenditures on account of which withdrawals are requested from the Loan Account on the basis of state- ments of expenditures, and shall enable the Bank's representatives to examine such rec- ords. Section 4.02 KOC shall: (a) have its accounts and finan- Corr'ied cial statements (balance sheets, statements of income and expenses and related state- ments) for each fiscal year audited, in accordance with appropriate auditing princi- ples consistently applied, by independent auditors acceptable to the Bank.  - 24 - Table 7: (cont'd) Section Covenant Status (b) furnish to the Bank as soon as available, Complied but in any case not later than six months after the end of each such year: (i) certi- fied copies of its financial statements for such year as so audited; and (ii) the report of such audit by said auditors of such scope and in such detail as the Bank shall have reasonably requested, including, without limitation to the foregoing, separate opin- ions by said auditors in respect of the expenditures and records referred to in Sec- tion 4.01 (b) of this Agreement, as to wheth- er the proceeds of the Loan are made avail- able to it and withdrawn from the Loan Account on the basis of statements of expenditures have been used for the purpose for which they were provided; and (c) furnish to the Bank such other informa- Complied tion concerning said accounts, financial statements, records and expenditures, as well as the audit thereof, as the Bank shall from time to time reasonably request. Section 4.03 KOC shall: (a) by October 1 of each year, Complied review with the Bank, KOC's current and future finances, including its trend of pro- duction costs, budget variance analysis, future investment program and related financ- ing arrangements; and (b) submit to, and review annually with the Bank, as part of the review of KOC's finances referred to in (a) above, its financial statements based on the rolling five-year plans.  - 25 - Table 8: USE OF BANK RESOURCES A. Staff Inputs Stage of Project Actual Staff-Weeks Through Appraisal 43 Appraisal through board approval/effectiveness 64 Supervision 154 Total 261 B. Missions Stage of Number of SW in Specialization Project Cycle Month/year persons field represented Through Appraisal Identification May 1983 7 4 E, PE, G, FA Appraisal Sep 1983 6 3 PE, G, FA Appraisal through Board Approval May 1984 Post Appraisal Supervision Supervision Jul 1984 2 1 PE, G Supervision Oct/Nov 1984 5 2 PS, PE, FA Supervision* Oct 1984 1 3 PS Supervision* Dec 1984 1 2 PS Supervision* May 1985 1 4 PS Supervision May 1985 5 1 C, FA, PE, PS Supervision* Sep 1985 1 3 PS Supervision Nov 1985 3 3 PS, FAG Supervision Mar/Apr 1986 1 4 PS Supervision Aug/Sep 1986 5 2 C, FA, PS, PE, FA Supervision Feb 1987 4 1 G, PE, PS, FA Supervision Oct 1987 3 2 PS, FA, PE Supervision* Mar 1989 3 1 PS, G, PE * Procurement supervision in combination with other projects, but only SW which were spent for supervision of Karamay Petroleum project have been counted. E - Economist PE - Petroleum Engineer FA - Financial Analyst PS - Procurement Specialist G - Geologist  CIHINA KARAHAY PETROLEUM PROJECT ANNEX 1 Economic Analysis (in million US$) Incremental oil --Total Coats----------- Total Net Nemo items under Project Incremental due to Project Benefits Benefits Total oil Price of oil b/ a/ Prodn light heavy Year Light Heavy Capex OM O&M Total HIT S/ ton S/ ton MM tons Light Heavy $110 1984 6.29 6.29 (6.29) 4.00 1985 O-1" 1.06 195.94 29.59 6.21 231.74 180.60 (51.14) 4.95 201 160.80 1986 0.33 1.52 204.95 33.08 15.14 253.16 282.35 29.18 5.44 195.00 156.00 1987 0 49 1.75 258.06 35.95 22.94 316.95 164.08 (152.87) 5.65 99.00 79.20 1988 0.61 1.64 262.47 36.42 30.38 329.27 218.88 (110.39) 5.49 126.00 100.80 1989 1.06 1.29 142.60 31.40 50.46 224.46 182.55 (41.91) 5.43 99.00 79.20 a 1990 1.44 1.38 71.90 33.87 63.37 169.14 275.98 106.84 5.75 120.00 96.00 1991 1.64 1.49 100.24 51.58 72.18 224.00 306.99 82.99 5.91 120.00 96.00 1992 1.80 1.74 67.32 58.69 79.22 205.22 323.97 118.75 6.18 113.15 90.52 1993 1.96 1.98 45.28 65.18 86.26 196.72 375.33 178.61 6.45 117.53 94.02 1994 2.07 2.13 41.87 68.20 91.10 201.17 421;26 220.09 6.58 123.37 98.70 1995 2.18 2.32 41.87 72.40 95.94 210.21 465.11 254.89 6.76 127.02 101.62 1996 2.28 2.30 37.30 70.07 100.34 207.71 510.83 303.12 6.73 135.68 108.55 1997 2.38 1.75 14.08 58.88 104.74 177.71 503.86 326.15 6.17 144.94 115.95 1998 2.48 1.11 0.00 46.45 109.14 155.59 482.94 327.35 5.53 154.82 123.86 1999 2.58 0.67 0.00 27.89 113.55 141.44 479.75 338.32 5.09 165.38 132.30 2000 2.68 0.54 0.00 22.53 117.95 140.48 514.62 374.14 4.97 176.66 141.33 2001 2.58 0.53 77.10 22.03 113.55 212.67 532.63 319.96 4.77 188.71 150.97 2002 2.48 1.03 93.59 45.19 109.14 247.93 635.84 387.91 5.14 201.58 161.26 2003 2.38 1.34 99.93 56.04 104.74 260.71 703.39 442.69 5.22 215.32 172.26 2004 2.80 1.65 108.38 69.23 100.34 277.95 786.98 509.03 5.36 230.01 184.01 ERR= 30.7w a/ garamay oil is transported to refineries as follows: By pipeline to Karamay Refinery (1 am ton); to Dushanzi Refinery (2.5 mm tons); Urumchi Refinery (1.5 nun tons); and by train fron, Urumchi to Lanzhou (the excess) at about a freight of 60 yuan/ton. b/ Future prices are based on Bank projections. Transportation costs to Refineries are deducted.  Ainex 2 _ 2 . (1 o~ r CHINA KMAIAAY PETROLEUM PMOJECT Key Fina nciat Indicators (in mittion yumns) 4 Opp U act 85 Opp OS ct 066pp S6 act 87 pp 87 ct ea act 89 ct 90 act 9l priv Sales Crude (PR tons) 4.1 4.3 4.3 4.8 4.8 5.0 5.3 5.6 5.5 5.3 5.6 5.6 Av. Price realized C.-ude (Yuan/ton) 135 138 14? 144 175 163 175 156 167 225 255 32) Revenues (M Yuan) 503 568 619 663 784 781 858 838 s8s 1143 1370 1886 Operating Expenses 408 396 442 524 s03 584 559 627 629 a88 1133 1505 Net Income SS S4 76 68 11? 87 119 83 100 103 94 154 Total Assets LonJ-term Debt 74 110 123 435 237 S69 297 649 802 1082 1160 1069 Equ ty 1652 1475 1997 1626 1956 1752 2022 207r 2424 2783 3186 3519 Debt Service 22 If 23 18 36 14 48 40 72 65 82 103 Capitat Expenditur S52 699 n20 71 640 1116 640 1373 1096 1013 925 lIe? Net govt. take 122 262 278 331 422 363 441 329 .38 604 422 Mi Ope ating Ratio 0.82 0.70 0.77 0.79 0.68 0.75 0.69 0.75 0.71 0.78 0.83 0.o0 Deb /Equity Ratio 4/96 7/93 6/94 21/19 11/89 25/75 13/8? 24/T6 5/1% 26/r2 211rl 13/t Debt Service coverage (times) 10.8 7.8 12.1 16.1 8.9 26.8 7.5 118 .6 3 L 9 S.8 I 2 Current Ratio 2.0 2.2 2.1 4.5 2.0 1.S 1.9 t I I.? 2.4 I 6 1 S Unit Cost of Prodn. (luan/ton) OJ S2 92 99 95 147 97 102 104 158 192 2S9 Lireit Cost o0 Prodn. (V/ton) 44.4 41.5 28.8 31.0 25.5 28.6 26.0 21.3 28.0 31 s 36.1 41.2  CHINA ANNEX 2 KARAMAY PETROLEUM PROJECT Page 2 of 2 Financial Analysis (in million yuans) Incremental oil Sales Capex due O0m Total Salem L Net Cash under Project Revenue to Project Coets Costs Income tax Flow a/ l/ Year Light Heavy MM tons 1984 9.90 9.90 (9.90) 1985 0.11 1.06 467.60 486.02 88.81 574.82 56.47 (163.69) 1986 0.33 1.52 728.40 638.50 150.22 788.72 115.22 (175.54) 1987 0.49 1.75 843.90 822.02 187.57 1009.59 122.62 (288.31) 1988 0.61 1.64 809.65 796.91 202.82 999.73 135.26 (325.35) 1989 1.06 1.29 814.00 619.02 355.31 974.33 105.71 (266.04) 1990 1.44 1.38 968.95 376.76 509.56 886.31 106.37 (23.73) 1991 1.64 1.49 1364.11 549.31 678.18 1227.49 169.08 (32.46) 1992 1.80 1.74 1534.26 368.89 755.72 1124.62 200.30 209.35 1993 1.96 1.98 1702.90 248.15 829.88 1078.04 234.17 390.70 1994 2.C7 2.13 1797.37 229.45 872.96 1102.41 247.72 447.24 1995 2.18 2.32 1916.50 229.45 922.52 1151.98 269.02 495.50 1996 2.28 2.30 1925.33 204.38 933.88 1138.27 255.93 531.14 1997 2.38 1.75 1658.02 77.18 896.66 973.84 121.46 562.72 1998 2.48 1.11 1347.89 0.00 852.64 852.64 53.92 441.34 1999 2.58 0.67 1140.49 0.00 807.97 807.97 45.62 286.90 2000 2.68 0.54 1098.08 0.00 810.80 810.80 43.92 243.35 2001 2.58 0.53 1013.29 422.50 790.36 1212.86 40.53 (240.10) 2002 2.48 1.08 1223.24 512.90 934.38 1447.28 48.93 (272.96) 2003 2.38 1.34 1281.83 547.60 980.55 1528.15 51.27 (297.60) 2004 2.28 1.65 1370.69 593.90 1039.59 1633.49 54.83 (317.63) FRR= 10.8i a/ Two tier pricing of a lower price upto 3.64 mm tone of total production and of a higher *lmost near international parity (adjusted for transportation to refineries) prevails. b/ Incremental capex is made up of both project investments and futtire iniveetmenta required to etiutaiin the pro )ect objectivetvc