India - Krishna-Godavari Petroleum Exploration Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 14786 PERFORMANCE AUDIT REPORT INDIA KRISHNA-GODAVARI PETROLEUM EXPLORATION PROJECT (LOAN 2205-IN) JUNE 30, 1995 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. Currency Equivalent Currency Unit Rupee (Rs) Rs 1 Paise 100 US$ 1 Rs 9.0 at appraisal time Rs 17.20 at project completion Rs I US$ 0.111 at appraisal Rs 1 US$ 0.058 at project completion Measures and Equivalents 1 Metric Ton (mt) 1000 Kilograms (kg) 2204 Pounds (lb) 1 Meter 3.28 Feet 1 Cubic Meter 35.3 Cubic Feet (cft) I Barrel (Bbl) 0.159 Cubic Meter I Metric Ton of Oil (37 API) 7.5 Barrels I Normal Cubic Meter(Ncu.m.) 33.42 Standard Cubic Feet of natural gas Bbl/d Barrels per day MMCM Million Cubic Meters per Day toe Tons of Oil Equivalent tpy Tons per Year Principal Abbreviations and Acronyms GOI Government of India IOC Indian Oil Corporation lOCs International Oil Companies K-G Krishna Godavari OIL Oil India Limited ONGC Oil and Natural Gas Commission Fiscal Year April 1 - March 31 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office Of Director General Operations Evaluation June 30, 1995 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on India Krishna-Godavari Petroleum Exploration project (Loan 2205-IN) Attached is the Performance Audit Report (PAR) on the India: Krishna-Godavari Petroleum Exploration project (Loan 2205-IN, approved in FY83) prepared by the Operations Evaluation Department (OED). The project was designed to support a three-year time slice of the exploration program of India's Oil and Natural Gas Commission (ONGC) in the Krishna-Godavari (K-G) basin, through improving geophysical data acquisition and interpretation, accelerating the drilling program to evaluate established prospects, and strengthening ONGC's capacity to design and implement exploration programs. The project was one of the Bank's first large scale efforts to assist a national petroleum company in its exploration efforts. The Bank-supported project focused on the areas of the K-G basin that had the highest exploration potential. ONGC continued its own independent exploration program in the less promising areas, and sometimes financed the drilling of wells that the Bank-supported project would not finance because there was no agreement on an exploration strategy on which to base an optimum exploration drilling program for the entire basin. Also, Bank staff was not used efficiently in so far as it got deeply involved in a detailed, well-by-well analysis of the most promising parts of ONGC's exploration program. The project was expected to improve the efficiency in the way ONGC used its exploration resources. It failed to achieve this goal because it was unable to influence ONGC's decision-making process on ONGC's equally large, own-financed, parallel exploration program. The Bank-supported program had an 8 percent rate of return. The Bank-supported program and the parallel, independent ONGC program, when considered together, produced a negative rate of return for the K-G basin exploration program as a whole. The lesson of this project is that Bank lending is not an appropriate vehicle for high risk exploration programs run by State petroleum companies. This fact was recognized and incorporated into the Bank's November, 1984 Oil and Gas Guidelines. The Bank has not financed such projects since the promulgation of these Guidelines. The Audit concludes that the project's outcome is rated as unsatisfactory, its sustainability as uncertain, and its institutional development as negligible. Bank performance is rated as unsatisfactory. Based on the Project Completion Report (PCR), the project outcome was rated as satisfactory because the PCR focused on the program financed by the project, while the PAR looked at the project in the context of the overall investment in the K-G basin, of which it was a part. 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 1 Contents Preface ...............3 Basic Data Sheet.... ...........5 Evaluation Summary..... ...............................................9 1. Background ........................................................ 15 2. Project Objectives and Description................................... .....17 3. Project Design and Schedule............................................19 4. Project Implementation .......................................... ......21 Extension of Loan Closing Date. .............................. ..........23 5. Project Costs.......................................................27 6. Project Results ......................................................29 Cost/Benefits and Efficiency....................................30 7. Project Issues .......................................................33 8. Project Sustainability .................................................39 9. Impact Assessment ....................... 41 10. Conclusions and Lessons Learned .......................................43 Annexes A. Figures 1 and 2 .....................................................45 B. Cost of Wells Drilled under World Bank Financing .............................47 C. Reserves Accreted, Exploration Discovery Index and Growth Function of Reserves Accreted on Annual Basis ..............................................49 D. Reserves & Status Of Discoveries Made In The Project Area......................51 E. Status of Wells/Discovery in K-G Basin .............................. 53 This report was prepared by Richard Berney (Task Manager) and Abdel S. El-Mekkawy (Consultant) who audited the project in October 1994. Administrative assistance was provided by Lorna Sibblies and Charles Strout. 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 wihout World Bank authorization.  3 Preface This is a Performance Audit Report (PAR) for the Krishna-Godavan Petroleum Exploration Project involving a Bank Loan of US$165.5 million which was fully disbursed. The main objective of the project was to establish the commercial potential of the Krishna-Godavari area, both onshore and offshore and to test the most promising oil and gas fields and/or prospects. The PAR was written in the Operation Evaluation Department (OED). To prepare it, OED reviewed the President's Report, the Staff Appraisal Report, legal documents, Transcripts of the Board Proceedings, Bank files and held discussion with the Bank staff associated with the project. An OED mission visited India in October 1994 where it held discussions with Government officials, management and staff of the Oil and Natural Gas Corporation (ONGC) at their headquarters in Delhi and at their operating offices in Madras and officials of the Gas Authority of India Limited (GAIL). The assistance provided by all the authorities, particularly ONGC had considerably helped the audit to formulate a coherent and accurate picture of the situation and is gratefully acknowledged. The PCR, which was of acceptable quality, concluded that the project was successful and that the results were satisfactory. The Audit supplements the PCR by viewing the project from the wider context of its impact on the overall exploration program for the Krishna-Godavari basin. It also addresses the development impact that the project has had on the Borrower and suggests ways that this impact could be enhanced in the future. Following standard procedures, OED invited Borrower comments on the draft PAR. No comments were received.  5 Basic Data Sheet Krishna-Godavari Petroleum Exploration Project (2205-IN) Key Project Dates Appraisal Expectations Actual Total Project Cost (US $ million) 633.8 698.2 Loan Amount (US $ million) 165.5 165.5 Economic Rate of Return n. a. 13% to -10% Yearly Estimated and Actual Disbursement (US$ million) Bank FY 1983 1984 1985 1986 1987 1988 1989 1990 Appraisal Estimate 26.5 66.1 59.5 13.4 Actual Disbursement 6.5 17.4 23.5 33.1 45.8 12.7 19.9 6.6 Actual/Appraisal% 24.5 25.8 31.1 48.6 76.3 84.0 96.0 100.0 Project Timetable Original Actual Identification Mission 10/81 Preparation 6/82 Appraisal Mission 11/8 1 Loan Negotiations 06/30/82 Board Approval 10/19/82 Loan Signature 11/09/82 Loan Effectiveness I2/1 5/82 02/28/83 Loan Closing 3.3 I;6 03/31/89 Loan Completion n9 10.,8609/30/89 6 Staff Inputs Category Staff Weeks Preparation 40.9 Appraisal 66.0 Negotiations 40.5 Supervision 157.1 PCR 9.0 Total 313.5 Mission Data Number Days Stage of Month/ of in Specialization Performance Type of Project Cycle Year Persons Field Represented' Ratingb Problems' Pre-Appraisal 1 04/81 2 12 FE,G - 2 10/81 3 10 FE,PE,G - Appraisal 1 05/82 3 12 FE,PE,G Supervision 1 12/82 4 14 F,PE,G,GP 2 P 2 04/83 2 4 F,G 2 P 3 07/83 4 7 F,PE,G,GP 2 P 4 12/83 3 8 PE,G,GP 2 O,P 5 04/84 4 10 F,PE,G,GP 2 O,P 6 09/84 4 5 F,PE,G,GP 2 P 7 04/85 5 5 F,PE,G,G,GP 2 P 8 09/85 2 5 PE,GP 2 P 9 05/86 2 7 PE,G,GP 2 P 1 11/86 2 6 PE,G 2 D 0 1 06/87 2 5 PE,GP 2 D 1 1 12/87 2 5 PE,G 2 D 2 1 07/88 2 7 PE,G 2 D 3 1 12/88 2 8 PE,G 1 4 Completion 1 03/90 2 PE,G 1 a. F - Financial Analyst, PE - Petroleum Engineer, G - Geologist, GP - Geophysicist b. I - Minor or no problem; 2 - Moderate problem c. P - Procurement; 0 - Operations; D - Disbursements 7 Related Bank Projects Year Loan Project Approved Purpose Status 1473-N, Bombay 1977 To develop the Bombay High Completed Offshore Development I offshore crude oil and associated 1980 gas production facilities, oil and gas pipeline and onshore terminal facilities. 1925-N, Bombay 1980 Continuation of the offshore crude Completed Offshore Development II oil and associated gas production 1983 facilities. 2241-IN, South Bassein 1983 To develop the South Bassein Completed Gas Development natural gas production facilities, 1988 gas pipelines to shore and terminal facilities. 2403-IN, Cambay Basin 1984 To develop Gujarat oil fields and Completed Petroleum evaluate adjacent prospects. 2785-IN, Oil India Petroleum 1987 To develop Assam oil and gas In progress fields and evaluate gas prospects in Rajasthan. 2904-IN, Western Gas 1988 To complete the development of Completed Development the South Bassein gas field with 1994 related onshore facilities and to develop Gandhar gas field.  9 Evaluation Summary Project Background 1. Despite the rapid development of its giant Bombay High oil field, India was importing more than half of its petroleum requirements at the time of project appraisal. The increasing demand for petroleum products coupled with the high international crude oil prices was imposig a heavy burden on India's foreign exchange position and on its ability to fund internal development. It was a matter of high priority to accelerate and optimize the petroleum exploration and development program. 2. The Oil and Natural Gas Commission (ONGC) was active in the Krishna-Godavari(K-G) basin and had drilled several wells. Some of them had hydrocarbon shows at the time ONGC requested the Bank to support its operations over the entire basin in an area of some 30,000 sq. km. The Bank decided to limit the project area to 17000 sq.km. covering most of the promising parts of the basin including those where some wells drilled by ONGC had proven the presence of oil and gas. Project Objectives and Description 3. The principal objectives of the Krishna-Godavari project were: * Improving on the definition of the onshore and the offshore prospects by seismic methods; * Accelerating the drilling program to evaluate the prospects currently identified; * Strengthening ONGC's capability in designing exploration programs, drilling through deep high-pressure gas zones, and drilling in the deep water/outer shelf environment. 4. The project comprised the following components: a. Onshore: 1700 line-kilometers of seismic surveys and drilling 12 exploratory wells; b. Offshore: 4000 line-kilometers of in-fill seismic surveys and drilling 16 exploratory wells; c. Technical Assistance: external support to ONGC for implementing this program. 5. The Bank indicated (SAR para. 3.06) that the project consisted of the 1982/83 - 1985/86 slice of ONGC exploration program in the project area. However, no mention was made at the time, nor later during implementation, as regard to the size and the extent of the exploration activities which would be carried out in parallel and independently by ONGC within and outside the project area. The project represented a huge exploratory undertaking over an extremely short time period. In addition to the exploration activities under the project, ONGC was financing an independent and parallel seismic and exploration drilling program in the K-G basin inside and outside the project area and of approximately the same size. 10 Implementation Experience 6. The Bank approached the project as a highly focused exploration and appraisal effort in the most promising area of the basin where ONGC had made significant exploration investment and had tested oil and gas in some wells and had few encouraging hydrocarbon shows in others. ONGC, on the other hand, acted on the assumption that the Bank loan represented additional funds for a time slice of an already set program for the basin exploration which ONGC was committed to execute during the project period. Since the highly prospective area was covered by the Bank project, most of ONGC fully financed program was directed to within the project area in parallel to the project activities. ONGC's efforts extended, as well, to low priority area outside the project area. Thus ONGC was able to finance from its own resources many activities which the Bank was unwilling to support through the project. 7. The project implementation took three years longer than planned. Part of the delay could be attributed to expanding the project scope, but most of it was the result of drawing an overly optimistic project schedule. The initial delays were in processing and interpreting seismic data needed to identify good drilling locations. The processing of the seismic surveys was delayed because there was a two-year backlog at the local processing center. Even when the processing bottleneck was resolved through contracting to foreign companies, interpretation of seismic results and collation of geological data suffered due to the extreme shortage of seismic interpreters assigned to the project. The availability of drilling rigs (some costing hundreds of thousands of dollars per week in rental fees) led to pressures to utilize those rigs, even when the drilling locations had not been fully appraised. When the Bank suspended financing drilling operations in the offshore areas for lack of sufficient seismic data, ONGC used its own resources and continued drilling in those areas. 8. Delays in procuring critical services and equipment were mostly due to the high level of authorization needed within ONGC and the Indian Government and sometimes to the overlap between equipment and services needed for the Bank project and those needed for the ONGC fully financed operations. An extended chain of command involved in implementing the drilling and completion programs also led to many delays. The practice of requiring field staff to defer to management levels at the regional or even the national headquarters for changes or deviations in a well drilling and completion program had lead to the postponement of logging, testing or casing a well when a hydrocarbon show was first discovered and resulted in missed opportunities in getting valuable information on a timely fashion. 9. The project was designed without the inclusion of specific breaks between the drilling of individual wells for the collation of new data from the drilling program and for the planning of new wells using this data. Those breaks or "time outs" are common in petroleum exploration programs because each well generates a wealth of new data and often necessitates a rethinking of the underlying assumption of the exploration strategy. Additionally, schedules normally comprise some triggering mechanisms designed to regulate the pace of drilling or even suspend drilling when the economics of such operations are questionable. 11 10 International oil companies (1OC) generally set a limit on the number of wells (or amount of exploration dollars) which if reached before a discovery is made, would trigger the suspension or complete stoppage of further exploration. It is also the industry standard practice to establish the minimum acceptable rate of return for any future prospect before commencing drilling. While the Audit is certain that ONGC and Bank staff were well aware of such criteria, it is evident that none was rigorously applied for the K-G exploratory efforts. As a result of the lack of an economic decision criteria, several structures in very deep water were drilled even though no technology existed at the time to produce from such deep waters if a discovery had been made. Similarly, an excessive number of appraisal wells was drilled on several structures, the most conspicuous of which was the Rava field, without an analysis of the economic benefits from producing these structures. 11. Technical assistance had been mostly to address drilling problems. It was used for designing successful and safe drilling programs and introducing good drilling practices offshore and onshore. However, TA allocations in the loan were grossly underutilized, and it did not cover areas such as training of ONGC staff, recruitment of well testing experts, early initiation of an oil habitat study and retaining of internationally known consultants to advise on certain technical and strategic exploration issues. In view of the absence of outside consultants, particularly a resident consulting firm with institutional backup, the Bank staff assumed a key role in the project implementation (staff input for project supervision totaled 157 staff weeks). 12. The project was 80 percent completed and about 50 percent under-spent by the time of the original loan closing date. An additional $20 million of the unutilized funds were needed to complete the project. In March 1988, one year after the original loan closing date, a two-year extension was granted. Concurrently, the project scope was increased to use loan savings. There was an additional extension for one year, along with further expansion of the project scope. The loan was fully disbursed, and it was closed three years behind schedule. Project Results 13. Four medium to small size fields having 38 million tons oil/gas equivalent were discovered. If one disregards the exploration expenditures done in the basin prior to the initiation of the project (estimated at $70 million) and the investment borne by ONGC outside the project area, the rate of return for investment done under the project is calculated at 13 percent (versus 10 percent according to PCR). The project in this sense, is reasonably successful. However, since it is difficult to evaluate the contribution of the wells and seismic results financed by ONGC within the project area on the project outcome, it is more logical to consider the total investment and benefits for the K-G basin as a whole. Under such scenario, the rate of return drops to 8 percent. If on the other hand, one follows the argument stated in PCR para. 5.1 that "... wells drilled by ONGC in the project area in parallel with the project budget did not materially affect the project results", and since discoveries at loan closing outside the project area resulted in no more than one million tons of oil equivalent recoverable reserves, the rate of return for the program fully financed by ONGC is negative (-10 percent). It would still be negative even if the reserves were doubled. 14. In addition to the tangible benefits, activities under the project provided ONGC with an exploration infrastructure and a wealth of knowledge which, if judiciously used, could result in more efficient and profitable hydrocarbon exploration and development operations in the future. Some innovative techniques were introduced, such as high resolution and shallow water seismic, 3- D seismic and best industry practices for offshore drilling safety and well control. However, the 12 project does not appear to have helped ONGC develop a strategic approach that will enable it to prioritize its investment program and optimize the use of resources in the future. Project Sustainability I 5. Exploration and appraisal efforts have confirmed the commerciality of a few small to medium size fields, one for oil and the others mostly for gas. ONGC will have no problem in applying its vast experience in developing and exploiting oil and gas fields acquired over the past quarter of a century to these minor discoveries. GOI is allocating for petroleum exploration some $2 billion over the next two years, including K-G exploration. To safeguard the project benefits, it is important that ONGC adopt a two pronged strategy: first, it should formulate and apply clear economic criteria for its exploration, appraisal and development programs including monitorable operational milestones and triggers that would cut off funding for unsuccessful activities. Second, it should reduce its own exposure to exploration and appraisal risks, in the still uncertain geologic environment of the K-G basin. through offering of acreage. with attractive terms, on a joint venture or a simple farm out basis. Factors of Performance 16. Project Needs to Be Viewed in a Broader Perspective: Project objectives were poorly specified. The objectives which simply aimed at accelerating the exploration program should have been aimed at implementing an optimum exploration program in the K-G basin as a whole and to maximize the recoverable hydrocarbon reserves in the most economic way. ONGC's activities were either duplication of the Bank financed efforts within the project area or were directed to lower priority locations outside the project area. The absence of a well articulated exploration strategy for the whole basin led to problems during implementation and to a waste of resources. 1 7. Built in Controls to Ensure E/ffctive Implementation Under Uncertainty: The project design and schedule lacked a built-in mechanism or an economic/empirical criteria for slowing down or stopping exploration activities once they become uneconomic. The project represented a huge exploratory undertaking by any international standard. The project schedule as drawn at appraisal assumed the availability of local logistic and technical support which was not forthcoming. Delay in seismic processing and interpretation coupled with the availability of drilling rigs led, at certain times, to drilling locations without full geological assessment, with little in the way of results to show for the money spent. 18. Economic and operational/empirical criteria for evaluating and monitoring exploration effectiveness should have been designed and agreed upon during project preparation and should have been built into the implementation schedule, with triggers to slow down or even stop further exploration work once the results demonstrated that it was becoming uneconomic. 19. The Role of Technical Assistance. Technical assistance was mostly limited to advice on drilling design and practices, and its allocations under the project were grossly underutilized. I Bank staff has pointed out that during project implementation it pressed ONGC to be more careful in the selection of prospects to be drilled instead of continuing to follow its previous policy that considered all prospects drillable, regardless of their hydrocarbon potential ranking. The Bank declined to finance the drilling of poor quality areas with insufficient preparation. However, the Bank had little leverage on how ONGC conducted its own, self-financed drilling program. and ONGC continued to drill poor prospects. 13 Limiting technical assistance to a few technical fields undermines its very purpose in technologically complex projects such as the Krishna-Godavari project. 20. Role of Bank Staff Bank staff assumed a very active and useful role in implementing and monitoring the project progress.2 The positive aspect of the Bank advice notwithstanding, there was a general feeling at ONGC that the Bank attempted to micro-manage or take over the project ownership. It was also inefficient for Bank staff to be used as the primary vehicle for technical advice, technical assistance and the transfer of technology during project implementation. 21. Rationale for Extending Loan Closing Date: Bank management extended the loan closing date twice, once for two years and another for a third year. Extensions were made without apparent regard to the Guidelines on Petroleum Lending , which since late 1984. restricted Bank support for petroleum exploration. 22. Savings which arose from the precipitous drop in the prices of petroleum services and equipment were used to expand the project scope each time the loan was extended, contrary to Bank Guidelines on the use of cost savings. It is to be noted that the drop in the prices of project inputs was the result of a very sharp drop in crude oil prices which would in turn adversely affect the project benefits. Ratings 23. The Krishna-Godavari Petroleum Exploration project was marginally successful in discovering oil in the basin; results in the area of the Bank project focus were reasonably successful. Project results could have considerably improved if a smaller size project was designed, more preparatory work done before drilling and a more flexible schedule with breaking mechanisms adopted. 24. The availability of Bank funds, coupled with the interest of the Indian Government to accelerate exploration, allowed ONGC to extend its K-G exploration operations to low priority areas and in directions that had low probability of success and which proved, eventually, to be unsuccessful. The PCR considered the project successful because the program financed directly by the Bank had reasonable results. The Audit takes the position that since exploration resources are fingible, the benefit of the additional resources made available by the Bank project must be judged by their impact at the margin, and at the margin ONGC's expanded exploration project was unsuccessful: wells drilled in low priority areas came up dry. The project outcome is therefore considered as unsatisfactory, its sustainability as uncertain and its institutional development as negligible. The PCR focused on activities within the project area financed by the Bank and disregarded all other operations solely financed by ONGC, hence PCR ratings of the project outcome were satisfactory and sustainable. 2 . Bank staf felt that it had to become increasingly involved in project implementation because ONGC's approach of evaluating exploration performance on the basis of the number otwells and neterage drilled was not cost effective. 14 Conclusions 25. With large projects, more attention should be given to the full evaluation of available logistic and institutional support. If such support could not be provided locally or through a third party, it would be prudent to scale down the investment to suit the local capacities. 26. The Bank should adopt the policy of revisiting the rationale of an investment at any time during implementation when there is a fundamental change in the prices of critical inputs or outputs. 27. When cost savings become available, loan extension should not be used to expand a project's scope. The justification to expand project scope calls for re-appraisal of project objectives and expected benefits. 28. When the Bank is supporting or financing a time slice of a program, it is important to view such a program in its totality in as far as priority of investments, scheduling of operations and allocation of resources. The Bank should not attempt to focus on the best aspects of an ongoing investment program while ignoring parallel activities financed by the Borrower. 29. Projects comprising complex long duration investment programs should be phased or tranched whenever possible. Economic and operational investment criteria should be agreed upon at appraisal and built in the implementation schedule at key milestones. Such milestones should trigger actions on behalf of the Bank and the Borrower to continue or suspend operations. While the programs would be appraised and presented to the Bank Board in their totality, loans may be approve-1 only for the first tranche with conditional approval granted for the rest of the program tranches. The objective would be to ensure that investment funds would stop flowing when newly acquired data demonstrate that the risk/reward ratio becomes unacceptable. 15 1. Background 1.1 India's sedimentary basins, where petroleum deposits may be found, cover an area of about 1.72 million square kilometers and number twenty seven. Only two basins provide commercial production, one in the Assam area and the other is Cambay basin in the west and it comprises the giant Bombay High field. However, indications of the presence of petroleum have been found in six other areas, top amongst which is the Krishna-Godavari, which was considered at the time of the project appraisal to be the most promising. Prior to initiation of the project the Oil and Natural Gas Commission (ONGC) had drilled five wells in the project area, in addition to two onshore wells drilled at the time of project appraisal. Estimates of India's petroleum resources stood at fifteen billion tons of oil, about one third of which would be recoverable and about two thirds of the potential reserves would be natural gas. Most, if not all, of the basins were under-explored with modem geophysical surveys having covered less than 50 percent of the prospective areas. 1.2 Despite the rapid development of its giant Bombay High oil field, India was importing more than half of its petroleum requirements at the time of the project appraisal. The increasing demand for petroleum products coupled with the high international crude oil prices was imposing a heavy burden on India's foreign exchange position and on its ability to fund internal development. It was a matter of high priority to accelerate and optimize the petroleum exploration and development program. The allocations for petroleum exploration and development, for the fifth five-year plan (1980/81-84/85) for ONGC and Oil India Limited (OIL) were revised upward from Rs33.3 to 53.8 billion (which was equivalent to US$6 billion and more than double the earlier five-year plan). 1.3 The project was originally identified by ONGC, which was active in the exploration of the Krishna-Godavari (K-G) basin. ONGC requested the Bank to support its operation over the entire basin in an area of some 30,000 kilometer square. The Bank's original position was to limit the exploration program to extensive seismic coverage and only several exploration wells. After further studies during the appraisal process the Bank agreed to increase the loan to $100 million, then $128 million (Loan Committee approval). By the time of Board presentation, the loan level was increased to $165.5 million, making this loan the largest loan the Bank has ever made for petroleum exploration. ONGC was the loan beneficiary and implementing agency of the project. The Commission was a government-owned statutory body created in 1959 by an act of Parliament to plan, promote and implement the development of petroleum resources and the production and sales of the products it produces. 1.4 Bank staff decided to limit the project area to 17,000 kilometer square covering the most promising part of the basin, where some wells had already proven the presence of oil and/or gas. Bank staff, considering the basins complex geology, had stressed the importance of obtaining an integrated interpretation of the seismic coverage and the wells' results onshore and offshore. They stressed, during the project appraisal process that the criteria for the selection of well locations would be based on the economic appraisal of each prospect.  17 2. Project Objectives and Description 2.1 The principal objectives of the Krishna-Godavari project were: * Improving on the definition of the onshore and the offshore prospects by seismic methods; * Accelerating the drilling program to evaluate the prospects currently identified; * Strengthening ONGC's capability in the design of exploration programs, the drilling of deep high-pressure gas zones, and the drilling in the deep water, outer shelf environment. 2.2 The project comprised the following components: a. Onshore: about 1,700 line-kilometers of seismic surveys, of which about 1,000 of which would be high resolution seismic lines centered on the deep high pressure zone; * drilling 12 exploratory wells, of which 5 will be in deep high-pressure gas prospects; and b. Offshore: * about 3,500 line-kilometers of special shallow water seismic surveys and up to 4,000 line-kilometers of in-fill seismic surveys in the remaining offshore area of the project; * drilling 16 exploratory wells, of which 5 would be on the outer shelf; and c. Technical Assistance: * external support to ONGC for the supervision of drilling, testing and completing of wells in the onshore high pressure gas areas and in the outer shelf areas; and, as required, for the improvement of quality control of geophysical data acquisition, processing and integration.  19 3. Project Design and Schedule 3.1 Early in the project life the Bank took the positions of: (a) the need to have an extensive seismic program including high resolution seismic with extended coverage, (b) limiting the number of the deep and expensive outer shelf wells to three wells, and (c) scaling down ONGC program to manageable increments in view of the risk involved. ONGC, on the other hand had proposed the drilling of 20 wells onshore and 17 wells in the outer shelf offshore area. A compromise was reached during the project appraisal, and the size of the project under the Bank loan was increased to include more drilling, but it still retained the emphasis on the seismic (particularly the introduction of shallow water seismic). 3.2 By the end of the appraisal process the project area was carefully delineated, and was limited to about half the Krishna-Godavari offshore basin, covering the areas where ONGC had already made substantial exploration investments which have resulted in discoveries. The selection of the project area was made with the view of building on the previous work of ONGC and assisting ONGC future efforts in further exploration work or efficient development of discoveries made under the project with available resources and technology. The Bank stated (SAR para. 3.06) that the project consisted of the 1982/83-1985/86 slice of ONGC exploration program in the project area. However, no mention was made regarding the size and the extent of activities which would be carried out in parallel and independently by ONGC within or outside the project area. 3.3 The project timetable, as drawn at the time of appraisal, was highly optimistic. Based on a startup date of early 1982, the project was to be completed in four years (by the end of 1985). Seismic surveys by the two ONGC crews were to be conducted, processed and interpreted by the end of 1983. The high resolution seismic program was planned to be fully completed including interpretation by January 1984. The mobilization and deployment of well drilling rigs for offshore and onshore work was predicated on completing the seismic schedule in time. Two drillships were scheduled to be hired for part of 1982 and were to be fully operative until at least late 1985. On land drilling operation would be done through the hiring of two contractor rigs in additions to two ONGC own rigs. For most of 1983 and all of 1984 all the rigs (the two offshore and the four land rigs) were to be concurrently engaged in drilling operations. Retroactive financing for seismic and offshore rig hire charges made after May 1, 1982 was provided under the loan.  21 4. Project Implementation 4.1 The project implementation took three years longer than planned. At least half of this delay is attributed to expansion of the project scope (see para. 4.11 and 4.12). Procurement difficulties and time needed to resolve the eligibility of Bank financing of drilling operations also caused major delays. Several factors contributed to procurement problems: first of all, the Bank financing was introduced into an already active operation, whereby ONGC had entered into contracts for rigs hire and services. Secondly, ONGC's own program was, on several occasions. ahead of the Bank financed program. Some equipment and services were common for each program. Reviewing previously tendered contracts and/or coordinating the project requirement of goods and services with ONGC's program was not easy. Thirdly, the decision-making and clearance of financial issues was kept at a high level within ONGC and GOL Though the Bank was assured that the project management would reside in Bombay/Madras, authority for most of the financial decisions was left with ONGC headquarters or with the Ministry of Petroleum. Major contracts had to be approved by the cabinet economic committee. The above bottlenecks had led, on several occasions, to serious delays in the acquisition of critical equipment and services. 4.2 The organization of the ONGC field office at Madras and its relationship to the regional office in Bombay was a matter of concern to the Bank at time of project appraisal. The exploration program was carried out by two distinct units of ONGC, one in charge of offshore, and the other of the onshore activities. The problem was eventually resolved by having the Offshore Project in Bombay oversee both the onshore and the offshore program. In 1986, ONGC went through a reorganization which redefined the relationship between the field staff and the management at the headquarters along functional lines (exploration, drilling, logistics, etc.). While administratively responsible to the General Manager at Madras, each department manager reported to and took directions from his headquarters functional director (in Delhi or Dehradun). Problems of coordination and turf between equals arose and in some instances adversely impacted the operations. It was only later in the project life, as the Madras office became better staffed and was given more responsibility to handle the operational load, that some of the administrative procedures were streamlined. 4.3 On the technical level, ONGC's operations and decision making were quite strict, bringing minute operating decisions to ONGC's vice president's level. The exploration and drilling program. including number, locations and depth of wells had to be approved by the ONGC board of directors. Well drilling and completion programs were given to the field offices through a General Technical order (GTO) by the office of the vice president for exploration. According to the PCR, the field technical staff could not change or over-ride GTO instructions without getting the headquarters approval. Additionally. wells drilling programs could not be easily adapted by the operators in the field to effectively and immediately respond to unexpected drilling problems or to changes in the geological conditions. The highly generalized GTO was an inefficient tool for drilling exploratory wells in the complex conditions of the Krishna-Godavari basin. The Audit learnt that while the GTOs contained fine print allowing field staff to take initiatives for minor changes, in practice, particularly during the original project implementation period, field staff deferred to headquarters management on all issues. This practice led to missed opportunities for getting valuable information in a timely fashion through testing/logging a well when a hydrocarbon show was first observed. 22 4.4 The seismic processing center at Dehradun had a backlog of almost two years. Early Bank supervision missions had recognized that fact and requested contracting part of the seismic processing work to two international contractors. The seismic program was delayed by about two years even with the contracting of most of the processing. With the processing issue resolved, another equally critical problem arose from a serious lack of geological and seismic interpreters among ONGC staff. For a good part of the original project implementation period, less than a handful of qualified interpreters were assigned to handle the large volume of geological/seismic data obtained from surveys and drilling operations. Bank supervision missions had repeatedly requested ONGC to increase the number of geologic interpreters from three to nine and to hire fifteen geophysical interpreters in addition to the three assigned to the project. The project continued to suffer from under staffing in these two areas throughout the implementation phase. 4.5 At a time when seismic processing was way behind schedule and interpretation of seismic data and collation of geological and drilling results delayed because of low staffing, an ambitious exploration and drilling program had been approved by ONGC management and the Bank. Drilling rigs financed under the project, some with daily costs in excess of $100,000, were contracted, and the requisite logistic support was mobilized. Without adequate seismic processing and interpretation services, ONGC was left with the choice of either committing to drilling locations that had not been fully evaluated or suspending its drilling operations. In no one case did ONGC suspend the drilling in the basin or cancel a drilling contract for lack of rigorous seismic or geological data. When the Bank suspended financing for the offshore drilling in the project area for almost two years until seismic coverage and interpretation was completed, ONGC self financed the freed offshore rigs and used them for much of that time to drill wells within and outside the project area. There is also evidence that ONGC fully financed and drilled exploration, appraisal/delineation wells that the Bank declined to finance within the project area. ONGC contended that established geological leads were enough to continue the drilling program with the then available seismic coverage and without waiting for the latest geological interpretation. 4.6 Discussions between ONGC and the Bank staff held both early in the project cycle and throughout the implementation phase had helped in better designing the project. First of all, the Bank succeeded in limiting the number of exploration wells in the deep water outer shelf area to only five. Though some of these wells were drilled before the processing and the full interpretation of the marine seismic data, the drilling of additional expensive but marginal exploration wells (the estimated cost per well ranged from $8 to $12 million) was minimized. Secondly, the Bank argued the need for shallow water seismic surveys to help integrate the results of the onshore and the offshore seismic and geological results. These shallow seismic results, supported by shows from a well drilled by ONGC, eventually resulted in the better definition of a productive structure (the Rava field). Thirdly, the Bank proposed, albeit five years after project implementation was initiated, the introduction of three dimensional (3-D) seismic surveys. 3-D surveys are normally recommended for exploration and appraisal work to help in delineating complex structures and better selection of wells' locations (and thus minimizing the number of dry holes). The 3-D surveys were carried out after loan closing, with ONGC financing, in several onshore and offshore areas and proved useful. Various supervision missions repeatedly proposed adoption of industry practices in well testing and completion. Well testing practices were not improved to the satisfaction of Bank staff up to the end of the project. 4.7 ONGC had proceeded with its own exploration and drilling program in K-G basin as if the Bank program was a complement and not an optimization of exploration efforts in the most promising area of the basin. ONGC continued its seismic surveys and drilling outside the project 23 area and within the project area, particularly, when the Bank declined financing the drilling of a certain location proposed by ONGC. An example of that was the offshore drilling by ONGC (para. 4.6) The following table shows the number of wells drilled under the project and those 100 percent financed by ONGC. Breakdown of ONGC and Bank Financed Projects Fully ONG Financed Bank Financed Before the Project During the Project Under the Project Area Exp. Wells App. Wells Exp. Wells App Well Exp. Wells App. Wells Outer Shelf 2 3 3 1 2 3 Inner Shelf ---- ---- 8 2 8 9 Onshore 3 ---- 11 7 15 13 Total No. of 5 3 22 10 25 25 Wells Extension of Loan Closing Date 4.8 At the time of the original loan closing date of 3/31/86, an amount of $84.4 million of the loan (51 percent) was disbursed and the project, as appraised, was about 80 percent completed. All seismic surveys were completed and processed (but not fully interpreted); 12 wells were drilled or were under drilling onshore, and 12 wells were drilled offshore compared with the original project design of 12 wells onshore and 16 wells offshore. Twenty million dollars were needed to complete the project as originally defined, and the resultant savings could have been in the range of $60 million, an equivalent of about 35 percent of the loan. The savings were the result of a precipitous drop in the rental charges of the drilling rigs and associated equipment, subsequent to the equally precipitous drop in petroleum prices. 4.9 The question of whether to grant an extension of the loan closing date and whether to allow ONGC to use the project savings by expanding the project scope was complicated by two major events that occurred before and during the period when the extension was under discussion. The first was the issuance of the Bank Guidelines for Petroleum Lending (OMS 3.82, November, 1984). The second was the relative improvement of the terms India was offering IOC undertaking exploration ventures. 4.10 Considerable discussions took place among Bank staff and management regarding the extent to which the Bank should adhere, at this juncture in the project cycle, to the November 1984 Guidelines of Petroleum Lending in the light of the project scope and its results.3 The original loan 3. The Guidelines for Petroleum Lending were issued at the end of 1984. The Guidelines recognized several key points: a) That under modem contractual arrangements, governments are able to negotiate terms which adequately compensate the country for the depletion of its non-renewable resources while providing adequate incentive to investors for the risks undertaken as well as the expertise and the capital provided; (b) The Bank seeks to assist governments in developing sectoral policies which define, among other things, the role ofnational companies and other operators, and the respective contributions of public and private investment; (c) Because of the high risk ofloss, exploration and appraisal drilling projects are typically financed completely with equity rather than loan capital; (d) To prevent Bank lending from displacing equity capital, the Bank will normally consider financing exploration or appraisal drilling only in a joint venture between the state or a national oil company and a financially responsible and technically capable private sector partner. The Bank 24 closing date and the project completion date passed without a decision on loan extension. Disbursement was temporarily suspended after at the time of original loan completion (9/30/86). At the same time, senior Bank management withheld the approval of another petroleum loan to India Oil Limited (IOL) until certain assurances were received that India would encourage the participation of lOC with IOL.4 By mid-March, 1987 (one year after the original loan closing date and more than two years after the Petroleum Guidelines were issued), a two year extension was granted. There is no paper trail in the project files that could shed light on the basis for the decision to extend the loan. 4.11 The loan extension was coupled with a sizable expansion of the project scope: the number of wells was increased from 28 to 40 (additional 10 onshore wells and shallow marine wells) and the seismic program was expanded by some 3600 line kilometers. A basin study was also added to the project scope. Concurrently with the Bank financed project, ONGC's activities were at an all time high level. The number of rigs contracted, or being contracted, for in the K-G basin comprised five onshore rigs in addition to ONGC owned rigs, an offshore jackup rig and two shallow marine rigs. Following a supervision mission later that year, Bank staff concluded that after drilling of 35 wells no commercial findings have been made. The remaining possibilities were limited to GS-16 (later renamed Rava), a near shore Miocene structure (where strong gas shows were encountered in a well drilled by ONGC prior to the Bank loan. That well had subsequently suffered a blow-out before reaching its objective). 4.12 An oil discovery in the shallow marine in 1987 and earlier onshore gas discoveries provided the basis and the rationale for a further loan extension from March, 1988 to March, 1989 and another expansion in the project scope to cover the drilling of an additional ten wells (bringing the total number to 50 as compared to an original number of 28 wells) and conducting 3-D seismic survey. The basin study, which was meant to integrate and update the geological, geophysical and will also consider financing farm-in by the state or national oil company where such an operation involves one or more other investors jointly with the state or the national oil company; and, (e) Bank petroleum operations should therefore be used to help borrowers to mobilize risk capital and commercial debt financing to the maximum extent feasible. The Guidelines made exceptions to the general rule of not financing the national companies involved alone in the exploration and appraisal work. It stated in para. 3 4 ,"The Bank will not normally consider financing exploration or appraisal drilling by a national oil company alone except where it can be demonstrated that: (a) the area has been offered widely on reasonable terms and conditions, including appropriate policy on pricing, and no investor has agreed to participate for reasons other than the incentive framework or the geological risk; and (b) an appropriate process has been designed to attract private participation in the subsequent appraisal and/pr development of the field. Foreign private risk capital is much less likely to be available for the exploration and appraisal of gas resources, particularly if these resources seem likely to be suitable only for the domestic market. Therefore, in gas prone areas, the Bank will encourage but may not require that a process to attract private participation in the subsequent development of the field has been agreed." 4. Earlier bidding rounds for petroleum exploration were successful in attracting but very few companies primarily because the tenns and conditions offered by G01 were much lower than the on-going international level in many other developing countries and the quality of the offered blocks was fair to mediocre in the judgment of IOC. During project implementation, discussions amongst ONGC, Government officials, Bank staff and Bank consultants were useful in devising and agreeing on contractual terms which were more realistic and in line with the ongoing international practices. Examples of such terms were the lifting out of the royalty clauses and substituting them with profit sharing on a sliding scale tied to rate of return and or investment multiples, the introduction of the staged work obligations and the acceptance by GOI of rapid cost recovery for the foreign company. IOCs welcomed such a change, though the terms were not at par with other more prospective countries, and appeared to be interested in bidding for exploration acreage provided the blocks offered by GOI were of good quality. Around the time of the original project completion date (fall of 1986), 27 blocks were offered to IOC in the third round of bidding. GOI negotiated and eventually entered nine contracts with foreign companies which comprised the obligation to drill nine wells. IOC level of response and exploration work obligations might have been much higher if the Government had offered to IOC more prospective exploration blocks with better contractual terms. 25 drilling data and could have been initiated years earlier under the Bank project, was agreed upon and financed by ONGC after the original loan closing. The 3-D seismic surveys proposed earlier by the Bank and included under the last loan extension were fully financed by ONGC and conducted after loan closing. The project was completed on September 30, 1989, three years behind schedule. 4.13 Geological complexity of the structures notwithstanding, it appears that more emphasis was put on drilling test wells in potential structures rather than on getting information through the suspension of drilling and evaluation of the geologic and the economic parameters of a specific find. As a result, ONGC drilled many more appraisal wells than needed, when judged by normal international commercial practices. The Bank financed project included 2 appraisal wells for the deep marine G-1 structure, 9 for the G-16 (later termed Rava discovery), 4 for Razole and 3 for Kaikalur, 2 each for Naraspur and Tatipaka, for a total of 25 appraisal wells. ONGC used its own resources to drill additional appraisal wells on the same structures (Razole, Naraspur, Tatipaka and Kailklur). The most glaring example of over-drilling was on Rava structure, where a total of 30 wells were drilled (nine with Bank financing) out of which only four wells were completed as producers when the field was sold to an IOC.  27 5. Project Costs 5.1 PCR estimate of the actual project costs were reported to equal $698.2 million equivalent. The Audit's recent discussions with the Borrower revealed that PCRs estimate of the project cost was much higher than the actual costs. According to ONGC financial records, ONGC's total expenditure on petroleum exploration in all of the K-G basin from 1981 to 1990 amounted to a total of Rs 993.55 crore or about $900 million equivalent. Such expenditure covered all exploratory work (drilling and seismic) inside and outside the project area before, during and one year beyond the loan duration. The cost of the work that ONGC carried out and financed by itself, which was implemented in parallel with the work implemented under the project, is estimated by the Audit to be at least equivalent to that covered under the project. Accordingly, the actual cost of the project should be no more than half of ONGC expenditures indicated above, substantially below that estimated in the Bank PCR.5 5.2 Tackling the issue of costs from a different angle, the Audit examined the cost of individual wells as reported in ONGC books (Annex B). The total cost of the 28 onshore wells and the 22 offshore wells amounted to Rs 1930 crore and Rs 2575 respectively. Converting these figures at the rupees/dollar exchange rates during the time of drilling brings the total cost for drilling to around $346 million equivalent. Adding the cost of the seismic surveys, technical assistance and front end fees as per PCR to the drilling cost brings the total project cost to $388 million equivalent, a value which is $310 million less than PCR estimates. It appears that the PCR included the cost of ONGC's entire K-G exploration program in the total project cost, even though the Bank officially associated itself with only a portion of this effort, ignoring what ONGC did with its own money. 5. In fact in their comments on the draft PCR, ONGC indicated to the Bank that the PCR calculation ofthe Revised Estimate Project Cost and the Actual project cost were more than twice those recorded in ONGC's books. ONGC calculated the actual project cost to be USS307.15 million while the PCR calculated it at US$698.2 million. Since the loan amount was USS165.5 million equivalent, the Bank financing appears to have been more than 40 percent of the total project cost, a figure that is much higher than the percentage estimated at time of appraisal and at the time of loan extension (26.1 percent and 27 percent respectively). Nevertheless, Bank staff maintain that their PCR figures are current  29 6. Project Results 6.1 PCR stated that the project resulted in 8 discoveries (2 oil and 6 gas); the success ratio for the 25 exploration wells was 32 percent and that for the 25 appraisal wells was 68 percent. PCR estimates of recoverable oil and gas reserves were 105 million barrels and 1,170 billion cu. ft. respectively. The total hydrocarbon recoverable reserves as estimated in PCR amounted to 39.3 million tons of oil equivalent (13.8 in oil and 25.5 in gas).6 However, only four of these eight discoveries are considered by the Audit as commercial: one oil (Rava offshore field) and three gas (Mandapeta, Pasarlapudi and Tatipaka onshore fields). In addition, there are few minor finds in the ONGC 100 percent financed area with an estimated recoverable reserves, at loan closing. of about one million ton oil equivalent. 6.2 The recoverable reserves estimated by Audit for the project area are in the same range of magnitude as those indicated in PCR (38 million tons of oil equivalent). About 40 percent of the reserves are oil in the Rava field (15 million tons) with the rest being mostly gas in the onshore fields. The reserves of some fields have been upgraded and others downgraded since loan closing. Annex D shows the in-place reserves at the time of loan closing from ONGC's and the Bank's (PCR) point of view and those as estimated by ONGC as of April 1, 1994. 6.3 Several structures were discovered under the project which contained hydrocarbons but which would not fit the definition of commerciality such as the outer shelf structures (G -1 and G - 2) which tested and flowed some 500 to 1900 barrels of oil per day from individual wells. These wells could not be termed commercial discoveries because the cost of development could not be recouped through future production. In fact, even if these exploration wells had discovered much larger oil field, with much higher potential production rates, the field would still not have been commercial, since at the time of project implementation no proven technology existed (other than pilots carried out by major IOG) to produce offshore wells in water depths of 900 feet. There were few other marginal onshore discoveries which might eventually become commercial if the production infrastructure around them was fully developed to serve other fields. An example of these are the several small pools on land which are currently producing oil, many on intermittent basis. The total combined daily production from these pools is currently less than 700 barrels per day. Some of the discoveries which appeared pronusing at time of loan closing have dried up and have been temporarily abandoned. 6.4 The project was partially successful in achieving its objectives since it accelerated the exploratory drilling program and helped in evaluating some of the prospects identified at the time of appraisal and those identified at a later stage. It improved the definition of prospects through conventional and high resolution seismic surveys, and it assisted in the integration of the onshore and offshore geology through conducting shallow marine seismic. 6. The in-place reserves, as calculated by ONGC for the K-G basin, are based on the Russian classification and include possible and potential reserves. Accordingly caution must be taken in calculating the recoverable reserves from the in-place figures. 30 Cost/Benefits and Efficiency 6.5 Results of petroleum exploration projects are measured by certain efficiency criteria, depending on the party concerned, the time of assessment and the purpose of the exercise. These criteria, which were referred to in PCR, are indicated below in increasing order of rigor: * The success ratio; * The oil/gas finding cost; and * The commerciality of the discovery based on an acceptable economic rate of return. 6.6 PCR stated that the success ratio for the project is 32 percent and 68 percent for exploration and appraisal wells and that the success ratios achieved were acceptable and exceeded industry worldwide experience. Explorationists like to use the criteria of success ratio which measures the ratio of wells encountering hydrocarbons to the total number of wells drilled. However, this criteria is inadequate for project evaluation. The success ratio is a mere indication of the presence of hydrocarbon and its detection through visual inspection or through down hole logging tools. It is a hint to the explorationists that the area could be hydrocarbon prone. The success ratio disregards questions about how much oil or gas actually flowed from the well or whether the find is commercially viable. Of the total number of wells drilled under the project, 25 were appraisal wells drilled in structures where hydrocarbon presence was already confirmed. For appraisal wells, the success ratio should have been much higher than the stated figure of 68 percent. It is obvious that the success ratio criteria is not an economically sound measure of a project success or failure. 6.7 The finding cost of new reserves is a crude but quick yardstick for assessing the success of an exploration effort. It simply provides the cost of a find in terms of hydrocarbon units per money unit spent. PCR's estimate of the finding cost for the Krishna-Godavari project is $2.50 per equivalent barrel of oil; PCR also indicated that the figure of two and half dollars was at that time above the average in frontier areas. However, K-G area was not a frontier area at the time of the Bank project, since hydrocarbons had already been found and tested in several wells. The Audit's estimate of the finding cost, taking into account all expenditure and all the reserves in the K-G basin, is about $3 per equivalent barrel of oil which is almost double the published average finding cost for semi-virgin petroleum provinces at the time of project implementation. If exploratory costs and the reserves were considered only for the project area financed by the Bank, then the average finding costs would be within the range prevailing at the time. 6.8 The economic rate of return on invested capital is a sounder measure of the project's profitability. In view of the complexity of the exploration investment programs implemented before the project and during the project and the concurrent expenditure by ONGC during project implementation, the Audit has used three scenarios, each with different cost stream, to calculate the respective rate of return. In all three scenarios, the net income per barrel equivalent (after deducting operating cost) is estimated at $13, or an equivalent of $100/ton. (The net income figure is based on an average operating cost of $3 per barrel equivalent and a sales price of $16 per barrel equivalent). * The first scenario takes into account all exploration expenditures in the K-G basin in their totality, prior and during the project implementation. Under this scenario, expenditures born by ONGC after the project completion for the appraisal of known discoveries (such 31 as Rava, Mandapetta, Tatipaka etc.) and development costs of those discoveries have been considered as part of the cost stream. IRR following this methodology is 8 percent. The Audit feels that this scenario is more representative of the project success. The second scenario considers only expenditures related to the defined project area. The project cost, as estimated by Audit (US$388 million) was used in addition to costs born by ONGC for later delineation and development as indicated under the first scenario. Income from fields discovered in the project area only were taken into account. IRR following this methodology is 13 percent. Alternatively, IRR for the ONGC fully financed operations inside and outside the project area (on the assumption that their expenditure within the project area did not materially affect the project outcome, PCR para. 5.1 and disregarding exploration expenses prior to loan approval) is a negative 10 percent. The third scenario is based on the assumption that lOCs would expect at least a 30 percent gross return on their investment. For the case of the Rava discovery, such a return could only be achieved if the previous exploration and development work on the Rava discovery is valued at around $100 million (a very small amount if compared to an estimated $280 million spent on the Rava find or to that of the exploration expenditures offshore). In fact, a group of private joint venture partners signed an agreement with ONGC for the joint development of the Rava field. Under the joint agreement the private parties would be compensating ONGC by a sum of $62.5 million for their 60 percent share (see para 9.3). 6.9 In addition to the tangible benefits discussed above, activities under the project provided ONGC with an exploration infrastructure and a wealth of knowledge which, if judiciously used, could result in more efficient and profitable hydrocarbon exploration and development operations in the future. Some innovative techniques were introduced such as high resolution and shallow water seismic and safety and well control of offshore drilling rigs. The basin study and the 3-D seismic, though financed outside the loan, proved of significant value. The technical assistance and the dialogue with the Bank staff in the areas of seismic and geological interpretations, wells drilling design, drilling practices, formation testing and completion appear to have assisted ONGC in strengthening its technical capabilities. Well blow-outs and abandoning wells or offshore locations, which happened quite frequently before the project, were limited to only one case in the project area during implementation. However, the project doe, not appear to have helped ONGC develop a strategic approach that will enable it to privatize its investment program and optimize the use of resources in the future. 6.10 At the time of loan closing, none of the discoveries had been put on production with the exception of some gas wells which were put on long term testing. The produced gas has been utilized in power generation, fertilizer factories and paper mills (para. 9. 1). ONGC was designing an early production system for the Rava offshore oil discoverv, whereby oil would be produced from one or more offshore wells to a floating oil treating/storage system from which the oil would have been shipped for sale; this plan was not implemented primarily because of he high cost involved for such temporary facility. 6.11 The availability of Bank funds. coupled with the interest of the Indian Government to accelerate exploration, allowed ONGC to extend its K-G exploration operations to low priority areas and in directions that had low probability of success and which proved, eventually, to be unsuccessful. The PCR considered the project successful because the program financed directly by the Bank had reasonable results. The Audit takes the position that since exploration resources are 32 fungible, the benefit of the additional resources made available by the Bank project must be judged by their impact at the margin, and at the margin ONGC's expanded exploration project was unsuccessful: wells drilled in low priority areas came up dry. 33 7. Project Issues 7.1 Project Efficacy vs. Relevance: One of the project's main objectives, as stated in SAR was accelerating the drilling program to evaluate the prospects currently identified for the onshore components and accelerating the drilling program on the many prospects (yet to be precisely defined) on the inner shelf and the identified prospects on the outer shelf for the offshore components, and this objective was clearly met. The project represented a huge exploratory undertaking in an extremely short time. The huge size of the project could be illustrated by comparing the work commitment of IOC exploring in India at the time the project was implemented with that of the project scope. Chevron drilled only 3 wells and spent some $29 million on exploring in an area of 28500 sq. kilometers, which was almost double the Bank's project area. 7.2 A question arises, however, whether these objectives were relevant to India's needs at the time. It is the Audit's view that they were only partly relevant. The objectives should have been to undertake an exploration program that would have the greatest profitability of increasing economically recoverable oil and gas reserves in the K-G basin, in a way that could provide reasonable rate of return to resources used. The Audit understands that ONGC strategic objectives of reducing India's dependence on petroleum imports was not matched by the slow and cautious approach of IOCs. The issue is that the accelerated program under the Bank loan was not geared to providing adequate returns. 7.3. From the outset, the Bank and ONGC had different approaches to exploration drilling. The Bank approached the project as a highly focused exploration and appraisal effort in the most promising area of the basin, where ONGC had made significant exploration investment (estimated at $70 million), with a few encouraging results. ONGC, on the other hand, conducted its business on the assumption that the Bank loan represented an addition to an already established program for the basin exploration which ONGC was committed to execute during the project period. The Bank overlooked these differences, preferring to choose a drilling program it wanted to be associated with, while totally ignoring the economic impact of ONGC's other expenditures. In fact, there was no discussion of how the activities within and outside the project area would be coordinated.7 7.4 It is clear that ONGC continued exploration work on low priority drilling locations. By ONGC's account, "The area for exploration for ONGC covered the entire K-G basin whereas the Bank agreed to support the programs only in parts of the area which appeared most promising. Such selective exploration gave an impression that their success ratio was very high." However, it is quite difficult to evaluate the precise extent in which drilling financed by the Bank and that financed by ONGC's own resources was a duplication of effort or had led to unwarranted investment. Such a review would have required a detailed examination of every prospective drilling location, the sequence of drilling wells and availability of seismic and geological data, an effort which would have taken several months, and would have added little to our understanding of the project results. 7. Bank staff has pointed out that during project implementation it pressed ONGC to be more careful in the selection of prospects to be drilled instead of continuing to follow its previous policy that considered all prospects drillable, regardless of their hydrocarbon potential ranking. The Bank declined to finance the drilling of poor quality areas with insufficient preparation. However, the Bank had little leverage on how ONGC conducted its own, self-financed drilling program, and ONGC continued to drill poor prospects. 34 Lessons: The absence of well articulated project objectives and an exploration strategy for the whole K-G basin (within and outside the project area) led to problems during implementation, waste of resources and a negative rate of return for the efforts outside the project area. The Bank's added resources enabled ONGC to fund lower priority investments than it would have without the Bank project. 7.5 Project Schedule: A great deal of optimism was exercised in drawing up the project schedule. Seismic programs were planned with the idea to complete acquisition, processing and interpretation by mid-1984 for the onshore part and by early 1985 for the offshore part, a plan which proved unrealistic even after the contracting part of the processing out of ONGC center to foreign contractors. No allowance was given for more planning and studies and integration of seismic data and results obtained from drilling of wells. The situation was further exacerbated by the fact that contracts for the hire of two offshore and four onshore drilling rigs, were made for one or two years each. The project schedule as originally drawn showed four and sometimes five rigs engaged in drilling simultaneously, that was in addition to the ONGC owned or financed rigs. Operations of these drilling rigs could not be supported by the sluggish seismic program. At the time the Bank requested the suspension of offshore drilling until the completion of seismic surveys, ONGC continued to finance drilling in the area (para. 4.7). 7.6 Industry practices and IOC mode of operation normally provide for as much as two years for the acquisition, processing, interpretation of seismic surveys and the assimilation of past drilling results and other geological data before committing to drilling the first location. That would be on the assumption that logistic, technical and logistic support were available. Unfortunately, there is also ample evidence that the available local logistic and technical support for such a huge operation was not forthcoming (para 4.2 through 4.5). Lessons: Drawing such a tight implementation schedule for the project, without waiting for seismic acquisition, processing and interpretation and with no time for data collation and basin studies lead to drilling less than optimum locations. Whether these locations in K-G, were financed by the Bank or by ONGC is immaterial. The additional pressures to ensure that all drilling rigs were fully occupied only exasperated this problem. 7.7 Stopping Rules fbr Exploration: It is not uncommon that a schedule for petroleum exploration project would include certain breaks between physical activities to provide time for collation of data and planning as well as some triggering mechanisms designed to regulate the pace of drilling or even suspend drilling operations. IOCs generally set a limit on the number of wells (or amount of exploration dollars) they are willing to spend, which if reached before a discovery is made, would trigger the stoppage or the suspension of further exploration activities. Additionally, IOCs normally establish beforehand the minimum acceptable ROR for any future prospect before commencing drilling. If the returns do not meet the set economic criteria, after evaluating the estimated physical parameters of the prospect along with the risks involved, no further drilling would take place. ONGC was well aware of these international practices. It had always granted IOCs working in India the "walk-away option" which gave IOCs the right to relinquish operations at the end of each exploration phase as long as their work commitment had been fulfilled for previous phases. If such criteria were set and agreed upon beforehand for the K-G project, the drilling of most of the deep-water offshore locations and many of the appraisal wells for the discoveries onshore and offshore would not have taken place (para. 4.13). 35 7.8 One of the yardsticks which is often used for monitoring the exploration effectiveness and efficacy is the ratio of reserves added to the exploratory effort expended in a particular basin or geological province. Effort could be expressed in monetary terms, time elapsed since continuos exploration started or simply the exploration footage/meterage drilled. In most basins the growth curve of the cumulative reserves added to effort spent demonstrates whether exploration activities are still in the early learning stage, have reached a mature phase and approach the point of diminishing returns. Such a relationship has been used and proved valuable in many parts of the world as a tool to monitor, from time to time, the degree to which the basin resources respond to exploration. Figures I and 2 on page 36 (based on data supplied by ONGC, see tables Annex C) show the exploration discovery index (EDI) expressed in reserves accreted in million tons of oil/gas equivalent per thousand meter drilled and the growth of reserves with time. It can be seen from figures 1 and 2 that the inflection point, where the reserves to effort relationship started to decline, occurred during 1985/1986. The decrease in EDI should have sent a signal to slow or stop exploration activities and take stock of the results at the time; however, such a slow down did not happen. Lessons: K-G project design and schedule lacked a built-in mechanism or economic/empirical criteria for slowing down or stopping exploration activities once they became uneconomic or less attractive. 7.9 Limited Scope of Technical Assistance: Less than 25 percent of the allocated $14.9 million equivalent of base cost for TA was used mostly for mobilizing drilling experts who successfully helped in supervising drilling operations and well designs. Some grant funds were used for TA for the supervision of offshore operations and for conducting a geological basin study. However no consultancy, other than in the drilling area were called upon. Other areas for possible technical assistance could have covered training of ONGC management and staff, early initiation of an oil habitat study (basin study) and retaining internationally known explorationists/consultants to supervise the project implementation and advise on exploration strategy. Lessons: As a result of not utilizing TA allocations, the transfer of technology and the introduction of international management concepts needed for running a huge exploration program were minimal. 7.10 The Role of Bank Staff Bank staff assumed a very active role in implementing and monitoring the project progress. In addition to discussing and reviewing yearly programs, the Bank staff was deeply involved in the selection of drilling locations, seismic programs and well drilling, testing and completion programs.8 To be in a position to provide such advice, the Bank had requested ONGC to mail monthly progress reports and bi-weekly drilling summaries, with formation boundaries, cores, logs, etc. Frequent supervision missions were made to keep abreast with various aspects of the operations and to participate in decision making. Staff input for the project supervision was 157 staff weeks, making the total staff input from identification to completion an impressive 313.5 staff-weeks. The positive aspect of the Bank advice notwithstanding (paras. 4.6 ), it appears that the role of the Bank was more of a joint operator than a lender. 8 . Bank staff felt that it had to become increasingly involved in project implementation because ONGC's approach of evaluating exploration performance on the basis of the number of wells and meterage drilled was not cost effective 36 Lessons: Bank staff played a key role in project implementation and provided valuable advice to the Borrower. However, there was a general feeling that the Bank attempted to micro manage or to "take over" the project ownership, directing how money would be spent rather than agreeing on guidelines for the entire K-G investment program that were agreeable to project management. Additionally, the Bank having limited number of professionals who could travel on two or three missions a year did not have the institutional backup nor the continuity of a resident consulting firn. 7.11 Loan Extension and Compliance with OMS 3.82 and OPl3.25: Bank management had several options with regard to loan extension: It could have fully adhered to the guidelines on petroleum lending and close the loan since the project was 80 percent complete with little to show in the way of results. It was recognized at the time that after drilling many wells that offshore work failed to result in any find of any resources of commercial value and according to the Bank staff, all discovered reservoirs were "thin and discontinuous, which might be typical of the area as a whole". With Bank financing curtailed, ONGC might have reconsidered its spending priorities, assumed less exploration risks and offered more acreage to IOC as it should have done. * It could have extended the loan closing date after reaching an agreement on a modest program that would have focused on appraising some of the discoveries and shows particularly those with gas potential. It was evident at the time that the onshore area was highly gas prone. Gas has been tested in wells spreading over a total distance of some 140 kilometers. In addition to the onshore wells, one or two wells could have been assigned to test GS-16 structure (later called Rava field) where hydrocarbons were found a couple of years earlier but were not tested (due to well blowout). Pursuing this option could have been justified on the grounds of assisting in exploring a gas prone area and in appraisal drilling of discoveries, which was fully consistent with the new guidelines. * The third option was to extend the closing date of the loan and expand the project scope to make use of the savings created by the precipitous fall in the cost of hiring drilling rigs in response to the plunge in crude oil prices in 1985. This was the option chosen even though it was in clear conflict with Bank Guidelines on Petroleum Lending and on the Use of Project Fund Savings. The argument of utilization of savings to increase the project scope was also flawed, on economic grounds, since the project profitability was adversely impacted by the decline of oil prices and the corresponding reduction of prospective income from the project. 7.12 The Bank management extended the loan for two years after a long internal debate (para. 4.10 to 4.12) without any conditionality on ONGC to encourage private sector participation and without any reference to the Guidelines on Petroleum Lending. Approval of the loan extension was granted one year after the loan closing date. Furthermore, savings estimated at about 35 percent of the loan, and which resulted from the fall of the prices of petroleum services and equipment, were utilized, contrary to Bank guidelines on cost savings, to expand the scope by about 70 percent over the original project scope. Lessons: By 1986, the Bank's Decision to extend the loan seems to have overlooked Bank guidelines and two ominous indicators: (i) the poor performance of the project to meet its implied objective of discovering more economically recoverable oil and gas reserves, and (ii), the precipitous decline in the prices of oil. These were enough to bring into question the entire 37 rationale for the petroleum exploration program. Ignoring them further decreased the cost effectiveness of the Bank's intervention. 7.13 Project Cost Estimate and Profitability: There is a major discrepancy between the cost of the project as estimated by Bank staff (PCR) and the figures supplied to Audit as per ONGC financial books (para 5. 1). With this issue resolved, a remaining issue arises as to which cost to use, that of the project which limits the cost to drilling and seismic operations within the project area and to those activities financed only by the Bank or the total cost incurred for exploring the K- G basin inside and outside the project area plus those born by ONGC before the Bank loan was approved. PCR calculates profitability using the project cost within the project area (but that cost figure is almost double the project cost estimated by Audit). According to PCR, the ERR is 10 percent. 7.14 Considering the conditions which prevailed during project implementation and the parallel financing by ONGC of certain project activities, it is more logical to conduct the profitability analysis for the whole program area, taking account of all the commercial reserves discovered and all the investments borne by ONGC (through Bank financing or through its own resources prior to and during the project implementation). The difficulty to separate the geological and geophysical data acquisition and interpretation in the whole basin for Bank and ONGC financed areas or to evaluate the impact of using the results from one well in the drilling of another well, whether it is in the Bank project area or in the ONGC financed area also supports this view. Lessons: Issues related to the actual project cost should be resolved before attempting any profitability analysis. Furthermore, taking the total exploration expenditure born by ONGC, inside and outside the project area. seems more of a logical basis for assessing the exploration effort in a single basin.  39 8. Project Sustainability 8.1 The major offshore field of Rava was discovered by ONGC but was not tested due to a blowout. Furthermore, the presence of natural gas was established onshore, through ONGC drilled wells, long before the Bank decided to become involved in the project. The well's results and the geological data including information regarding discoveries or hydrocarbon occurrences were made available to the Bank appraisal team and had helped Bank staff in selecting the high priority area for the project. 8.2 The Krishna-Godavari exploration and appraisal efforts have confirmed the commerciality of few small to medium size fields, one oil, and the others are mostly gas. ONGC will have no problem in applying its vast experience in developing and producing oil and gas fields acquired over the past quarter of a century to these minor discoveries. Additionally, ONGC's use of the wealth of information accumulated during the project implementation and the new and novel exploration and drilling techniques introduced would no doubt continue. 8.3 Current indications point to two trends: first, GOI is offering many blocks in K-G basin and other basins for bidding by IOCs with little success (72 blocks offered with only five negotiated and two concluded). Second, appropriations by GOI for exploration by the national companies are quite sizable. An accelerated petroleum exploration program (APEX) is under implementation with a budgetary allocation for the national oil companies (ONGC and OIL) of some $2 billion over the next two years. Furthermore, adjustment of gas prices does not seem implementable in the near future. 8.4 To maximize these benefits, it is important for ONGC to: (a) judiciously reduce its exploration and appraisal expenditure and adopt a cost effective plan with specific economic criteria and operational milestones and triggers, and, (b) reduce its own exposure to exploration and appraisal risks, in the still uncertain geologic environment of the K-G basin, through offering of acreage, with attractive terms, on joint venture or simple farm out basis. ONGC should also be given the freedom to directly market its gas production or sell it to the national gas company (Gas Authority of India Limited, GAIL). Such an arrangement would create competition and would also enable ONGC to exploit and market, to nearby communities, production from small gas reservoirs/wells which may not interest GAIL or fit its large scale plans. 8.5 Though ONGC and/or its joint venture partners would optimally exploit future discovered oil and gas reserves, excessive expenditure on exploration without a breaking mechanism based on economic criteria will endanger the economic and institutional sustainability of the project. Unless the above issues are addressed, particularly those related to drastically cutting exploration expenditures and optimizing appraisal and development work, the sustainability of the benefits gained from the project will be uncertain.  41 9. Impact Assessment 9.1 During the last five years since loan closing, ONGC had continued the exploration activities in the K-G basin and the appraisal of the oil and gas finds. Several hydrocarbon accumulations have been found, but most of them were quite modest, having recoverable reserves less than two million barrels of oil equivalent each. The commerciality of most of these discoveries in the shallow offshore, except that of Rava field, is highly questionable. Nevertheless, ONGC has managed to exploit some of its oil and gas reserves. In particular, gas production started in 1988/89 at a modest annual rate of 14 million cm and increased steadily to about 550 million cubic in 1994 (1.6 million cm/day). With the addition of more thermal power generators in the area, gas demand are expected to more than double by 1996/97 to 3.5 million cm/d. No further increase in gas production is envisaged since the demand in the area will be almost fully satisfied by 1997. and the available reserves and production potential do not warrant building a major trunk line to transport gas outside the K-G area. Oil production from all the onshore fields has been at a very low rate and did not increase beyond a modest 100 tons per day. ONGC is doing a commendable job of recovering marginal volumes of oil and gas from some small fields through what is termed early production system (EPS) or extended production testing (EPT). Annex E shows the rate of oil and gas production for the year 1989/1990 (at the project completion time) and the cumulative production from all fields in the K-G basin as of October 30, 1994. 9.2 ONGC drilled many appraisal wells in the Rava field after project completion and has put four of these wells on production. Exploration activities on the Rava area up to 1990 (including those financed under the Bank loan) amounted to Rs 427 crore. Additional appraisal wells were drilled since then. Two small offshore platforms were constructed and two submarine pipelines were laid to shore. A large onshore installation for receiving and processing Rava production was built. At the present time Rava's production is 7000 bbls/d. Oil is transported by trucks from the shore installations to a refinery some 300 kilometers away. 9.3 In August 1992 the Government of India offered 12 small to medium size oil discoveries to private companies for development under un-incorporated joint venture arrangements between these companies and ONGC and OIL (that effort was complemented by another offering of 29 discoveries in 1993). On October 27, 1994 GOI signed the first crude oil production sharing contract with a consortium of companies comprising private companies from India, Australia and Singapore together with ONGC for the development of Rava oil field in the Krishna Godavari basin. Under that agreement ONGC has 40 percent participating interest in the venture. The Government would be getting about 35 percent of the petroleum from the project in taxes and royalties and will have the option to buy the rest at international prices. The development cost of the field, as estimated by the joint venture, stands around $200 million. In addition, ONGC is being paid by the private parties a signature bonus of $12.5 million and will be reimbursed $50 million for the exploration activities already carried, the development costs and the cost of the onshore terminal (as compared to an estimated expenditures by ONGC of $282 million). It is anticipated that production would peak at 1.5 million tons per year (30,000 bbls/d).  43 10. Conclusions and Lessons Learned 10.1 The Krishna-Godavari Petroleum Exploration project was marginally successful in discovering oil in the basin; results in the area of the Bank project focus were reasonably successful. Project results could have considerably improved if a smaller size project was designed, more preparatory work done before drilling and more flexible schedule with breaking mechanisms adopted. 10.2 The availability of Bank funds, coupled with the interest of the Indian Government to accelerate exploration, allowed ONGC to extend its K-G exploration operations to areas and in directions that were unsuccessful. Since exploration resources are fungible, the Bank project must be judged by its impact at the margin. The project is therefore considered as unsatisfactory, its sustainability as uncertain and its institutional development as negligible. 10.3 Before embarking on large projects, the Bank should evaluate all the logistic support and institutional strengths and weaknesses, and should ensure that critical staff shortages are filled or scale down the size of the project to fit domestic capacities. 10.4 When the Bank is supporting an on-going investment program or financing a time slice of such a program, it should view the program in its totality and devise mechanisms for coordination of efforts and optimization of resources. Choosing to be associated with only the best part of the program is an illusion whenever funds are fungible as they were in K-G. The Bank's added resources enabled ONGC to find lower priority investments than it would have without the Bank funds. 10.5 The Bank should have insisted at the outset that no drilling would take place before completing the processing of seismic data and the full integration of seismic interpretation, geological data and wells results into an oil habitat/basin study. Such a study, which would be updated from time to time as more information become available, should have provided the basis for the selection of all drilling locations. 10.6 Economic and operational/empirical criteria for evaluating and monitoring exportation effectiveness should have been designed and agreed upon during project preparation and should have been built into the implementation schedule, with triggers to stop exploration work once the results demonstrated that was becoming uneconomic. 10.7 Technical assistance components of complex projects such as petroleum exploration should be designed and fully implemented with a view to transfer technology, to build institutional capability and to introduce best management practices to the Borrower's operations. Limiting technical assistance programs to but a few technical fields undermines the very purpose of such programs. 10.8 Bank staff should not be used as the primary vehicle for technical advice, technical assistance and the transfer of technology during project implementation. Where guidance is needed the appropriate TA should be covenanted as part of the loan (as is consulting services for construction contracts), with the role of the Bank's technical staff limited to the provision of oversight and review. 44 10.9 BN 1986. following the precipitous decline in the prices of oil, the entire rationale for the petroleum exploration program should have been brought into question, since the impact of the drop in crude oil prices might more than offset the decline in exploration costs. 45 Annex A Figure 1 5 Year Average Annual Reserves Accreted and EDI 24- 22- 20 .0.5 18- 8 16 - .4 1l4 å12- 0.3 Z S10- lo- > cu 8 0.2 6- >4- -0.1 > c 2- 1979 1980 81 82 83 84 85 86 87 88 89 90 91 92 Years Figure 2 140 Cumulative Reserves Accreted 120- 100- 80- 60- -40- 20- 0 1980 81 82 83 84 85 86 87 88 89 90 91 92 Years  47 Annex B Cost Of Wells Drilled Under World Bank Financing (Loan No. - 2205-IN) (Rs in Lakhs) SNo. Well Name Cost S.No. Well Name Cost Offshore 1. G-1-6 1575.62 12. GS-16-3 757.00 2. G-1-7 1969.69 13. GS-16-4 848.00 3. G-2-4 1526.02 14. GS-16-5 1407.00 4. G4-1 1273.62 15. GS-16-6 895.00 5. GS-15-1 1688.47 16. GS-16-7 756.00 6. GS-1-1 1144.25 17. GS-16-8 748.00 7. GS-5-1 1645.69 18. GS-16-9 826.00 8. GS-11-1 2135.76 19. GS-16-10 998.00 9. GS-12-1 1074.23 20. GS-16-14 875.00 10. GS-14-1 1056.41 21. GS-17-1 829.28 11. GS-16-2 681.00 22. GS-18-la 1049.52 Onshore 1. RAZOLE -2 571.74 15. PALAKOLE-1 1238.16 2. RAZOLE-3 554.66 16. BHIMANNA PALLI-2 492.12 3. RAZOLE-4 926.80 17. KKLUR-1 340.04 4. RAZOLE-5 469.44 18. KKLR-2 298.39 5. RAZOLE-6 825.48 19. KKLR-3 382.56 6. NARSAPUR-3 1204.21 20. KKLRO4 353.70 7. NARSAPUR-5 1223.73 21. KAZA-1 398.94 8. TATIPAKA-1 1233.43 22. MAGATAPALLI-1 566.12 9. TATIPAKA-2 604.27 23. CHINTALAPALLI 967.98 10. TATIPAKA-3 699.89 24. MANSAPETA-2 694.41 11. VADAPARRU-1 675.01 25. MANDAPETA-2 681.22 12. PASARALAPUDI-1 938.04 26. NIMMAKURU-1 482.71 13. PASARALAPUDI-4 447.0) 27. KANUKOLLU-1 452.78 14. MASTYAPURI-1 1084.82 28. BANTUMALLI-1 498.86  49 Annex C Reserves Accreted, Exploration Discovery Index and Growth Function of Reserves Accreted on Annual Basis Exploration Discovery Index (EDI) Derived from ONGC Data 5 year Average Reserve Accreted Reserve accreted 5 years average (AMI/lO000m) Effective Year 0 + OEG MAt/year drilled meters m/year 1.1.84 2.88 1.1.85 6.10 32656.4 0.19 1.1.86 15.82 43388.6 0.36 1.1.87 21.02 50722.4 0.41 1.1.88 23.17 59983.0 0.39 1.1.89 22.46 70179.2 0.32 1.1.90 18.33 80470.4 0.23 1.191 9.07 85234.8 0.11 Yearly and Cumulative Reserves Accreted Derived From ONGC Data Reserves Accreted Cumulative Reserves Year million tons million tons 1979 to 1984 14.5 14.5 1985 16.0 30.5 1986 48.5 79.0 1987 26.0 105.0 1988 11.0 116.0 1989 .0 116.0 1990 6.0 122.0 1991 3.0 125.0 4 51 Annex D Reserves & Status Of Discoveries Made In The Project Area Discovery Hydrocarbon In place Reserves 1/4/94 Estim. Present Status (oil & oil equiv. Recoverable Gas. Million tons) Reserves 30/10/94 1/1/90 million tons equivalent Rava Oil 55.7 56.5 15 4 wells on production joint venture will develop Mandapeta Gas 18.7 27.2 13.6 Will be put on prod. as gas demand increases Pasarlapudi Gas 13.9 10.9 5.6 On production, providing most of gas sales Tatipaka Gas 3.0 4.2 2.4 Razole Gas 4.0 .19 0.8 Others Mostly Gas 7.5 2.9 0.6 Narsapur is (Kaikalur, abandoned, most Bantumilli, of others are Chintinapalli, offered for bidding Mansapur ....) Total 38.0 Recoverable N.B. In ONGC financed areas: * Only two discoveries Palakolla and Lingala were made on the time of loan closing. The two fields have in place reserves at the present less than two million tons and estimated recoverable less than one million tons. * Other discoveries/finds were made since loan closing, However, most are non-commercial and all have no appreciable productions (see annex 4.1, status of discoveries in the K-G basin). None of the offshore structures, other than Rava, have been put on productions due to their non-commerciality.  53 Annex E Status of Wells/Discovery in K-G Basin Well/Discovery Production Cum. Prod. Current Status during 89/90 up to 30.10.94 Remarks Oil/Gas oil in metric tons, gas in 6000 m3 Kaikalur #3 Oil 1,800 9,800 intermittent Gas 300 25,00 production Kaikalur #7 Oil 300 300 intermittent Gas Negl. Negl. Tatipaka Oil N 31,600 Gas N 1,241,900 5 wells on prod., daily potential IMMm3 Passarlapudi Oil N 3,600 Gas N 110,600 8 wells on prod. daily potential I MMm3 Nanaspur Oil N 2,100 one well on prod. Gas 2,800 169,100 rate dropped to 1OMm3/d Bantarnelli Oil 200 200 closed due to very Gas 300 400 prod. at very low rate Chintanapelli Oil N 100 Gas N 26,300 one well on prod. Mandapeta Oil N 300 six wells with Gas N N potential of 2.50 M cu.m. Other onshore wells/ fields outside project area Oil 6,200 87,000* Gas 200 148,400 Total Onshore Oil 8,500 135,000* Gas 3,500 1.699,200 Total Offshore (Rava field) Oil N 268,600* Prod. from 4 wells/ Gas N 20.900 6 strings in Rava field Grand Total Oil, ton 8.500 403,500 Total cumulative about Gas, (000 m3 3,500 1,720,000 1.72 million ton oil equivalent * Many appraisal wells onshore and offshore were drilled after loan closing; hence, production from offshore and onshore project areas should not be solely attributed to project activities.   IMAGING Report No: 14786 Type: PPAR