Bolivia - Gas Pipeline Project

RESTRICTED FILE COPY Report No. p-705 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE COMPANIA YACIBOL BOGOC TRANSPORTADORES IN THE REPUBLIC OF BOLIVIA June 19, 1969  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO C%1PANIA 1ACIBOL BOGOC TRANSPORTADORES IN THE REPUBLIC OF BOLIVIA 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$23,250,000 to Compania Yacibol Bogoc Transportadores (YABOG) for the construction of a natural gas transmission system to deliver gas from Bolivia to Argentina. PART I - HISTORICAL 2. Substantial reserves of natural gas have been discovered in eastern and southern Bolivia in recent years by the Bolivian Gulf Oil Company (BOGOC), a wholly-owned subsidiary of Gulf Oil Corporation and, in more limited quantities, by Yacimientos Petroliferos Fiscales Bolivianos (YPIB), the Bolivian state oil company. These discoveries led to the early examination of export possibilities, since the present and potential market for natural gas in Bolivia is very small relative to the available reserves. Domestic production of gas in Argentina, on the other hand, is lagging behind the requirements of a large and growing market. There is already a pipeline from the gas fields at Campo Daran, a town in Argentina near the Bolivian border, to Buenos Aires and those gas fields are rapidly becoming depleted. It is now proposed to construct a pipeline from the Bolivian gas fields to the Bolivian border, to be linked there with the Argentine system. The construction and operation of the Bolivian line would be a joint venture between BOGOC and YPFB. In July 1968 YPFB and BOGCC signed a long-term Sales Agreement with Gas del Estado, the Argentine state gas company. 3. The Bank was approached by Bolivia in October 1967 to help finance its share of the project and detailed discussions of a loan to YABOG got under way following the signing of the Sales Agreement. An appraisal mission visited Bolivia and Argentina in January 1969 and negotiations took place in Washington April 30 - May 8, with YABOG represented by its sponsors, YPFB and BOGOC. The delegation was led by Ing. R. Pena, President of YPFB and of YABOG, and by Mr. Walter Wilds, Assistant Treasurer of Gulf Oil Corporation. The Government was repre- sented by His Excellency Col. Julio Sanjines-Goytia, Ambassador of Bolivia to the United States and by Dr. G. Navarro, Director of Petroleum in the Ministry of Mines and Petroleum.  - 2 - 4. This would be the first Bank loan to Bolivia. Prev-ously, IDA has made four credits to Bolivia, the status of which as of May 31, 1969, was as follows: (US$ million) Credit No. Year Borrower Purpose Amount Undisbursed 61 1964 Republic of Bolivia Power 10.0 0.8 62 1964 Republic of Bolivia Power 5.0 - 107 1967 Republic of Bolivia Livestock 2.0 1.3 148 1969 Republic of Bolivia Power 7.41/ 7. / IFC has made no investments in Bolivia. PART II - DESCRIPTION OF THE PROPOSED LOAN 5. BORROWER: Compania Yacibol Bogoc Transportadores (YABOG), a company formed jointly by Yacimientos Petroliferos Fiscales Bolivianos (YPFB) and the Bolivian Gulf Oil Company (BOGOC). GUARANTORS: (a) The Republic of Bolivia; (b) YPFB and BOGOC, with the Gulf Oil Corporation guaranteeing performance of BOGOC's guarantee. AMOUNT: In various currencies equivalent to US$23,250,000. PURPOSE: To finance half the cost of construction of a pipeline system to deliver gas from Bolivia to Argentina. AMORTIZATION: In 21 years, including a 2-year period of grace, through equal semi-annual installments of principal beginning May 1, 1971 and ending May 1, 1990. INTEREST RATE: 6-1/2% per annum. COMMITMENT CHARGE: 3/4 of 1% per annum. PART III - THE PROJECT 6. A report entitled "Appraisal of the Compania Yacibol Bogoc Transportadores (YABOG) Gas Pipeline Project" (PTR-19) is attached. 1/ Not effective as of May 31, 1969.  - 3 - 7. The Sales Agreement, which has been approved by both the Argentine and Bolivian Governments, provides for deliveries of gas over a 20-year period beginning not later than August 1970. Gas del Estado is obligated to purchase (on a "take or pay" basis), at a fixed price in U.S. dollars, 141 million cubic feet per day for the first 7 years and 159 million cubic feet for the following 13 years. To transport the gas to Argentina, a 24-inch pipeline, 329 miles in length, will be built from tho Santa Cruz region in eastern Bolivia, where the principal gas fields are located, to the border at Yacuiba. Gas del Estado will build a short connection on the Argentine side of the border to link the new pipeline with its existing pipeline to Buenos Aires. The project includes, in addition, the con- struction of a 12-3/h-inch lateral pipeline, 89 miles long, to connect YPFB's Monteagudo field in southern Bolivia to the main system. 8. Underlying the project is the concept that the export of natural gas should be a 50-50 joint venture between YPFB and BOGOC. Accordingly, the basic inter-company agreements establishing YABOG give each partner the right to supply up to 50 percent of the contracted amounts of gas, and the obligation to make up any quantity which the other cannot supply. BOGOC's proven reserves are more than adequate to meet its commitments (BOGOC could, in fact, supply all of the gas committed to be sold); YPFB's present proven reserves are sufficient for its 50 percent share for the first twelve years of the Sales Agreement and its chances of discovering additional reserves are considered promising. 9. The project addresses itself directly to one of the basic structural problems of the Bolivian economy - the need to develop new exports. While there has been some diversification, Bolivia remains highly dependent on tin for its foreign exchange earnings. The beginning of petroleum shipments through the Chilean port of Arica in 1966 has been the only major new export development in recent years. Medium-term export prospects are not bright and the export of natural gas through the pipe- line represents the only important addition to exports on which Bolivia can count in the foreseeable future. After allowing for debt service and other foreign exchange costs, the pipeline can be expected to benefit the Bolivian balance of payments to the extent of about US$6.5 million yearly, as compared with present total exports of about US$160 million annually. The net foreign exchange inflow would rise significantly if Argentina should, as now seems probable, need to increase its gas purchases from Bolivia above the amounts presently contracted. The pipeline system has been designed with this in view and, when fully powered by compressors, it will be able to transport about double the amount of gas now contracted for export. 10. The financial plan also reflects the basic 50-50 concept. YABOG has been formed as a non-profit company with negligible capital and it will borrow, on the credit of its sponsors, all of the funds required for the construction of the pipeline. Gulf's contribution takes the form of a loan from the New York State Pension Fund, guaranteed by Gulf, which will finance approximately 50 percent of the cost of the project, while Bolivia's is represented by the proposed loan from the Bank to finance the other half of the project. The Bank loan would be guaranteed by the  - 4 - Government of Bolivia. In addition it is supported by guarantees from YPFB, BOGOC and the Gulf Oil Corporation as described in paragraph lt below. 11. Arrangements for channeling the proceeds of the gas sales are also designed to protect YABOG's ability to meet its obligations. Gas del Estado will pay for the gas it receives in dollars directly into a special account at the Morgan Guaranty Trust Company in New York. That bank will be given irrevocable instructions under which it will be respon- sible for ensuring that sufficient funds for servicing YABOG's debts and meeting its operating and other costs are on hand before distributing the balance of the sales proceeds to the sponsors. The balance of the proceeds will be disbursed to YPFB and BOGOC in proportion to the net value of their deliveries of gas to the pipeline. If, for any reason, the proceeds from the sale of gas are insufficient at any time to cover YABOG's obligations, the Morgan Guaranty Trust Company will be empowered to call on the sponsors to make up the cash deficiency. 12. The total cost of the project is now estimated at US$46.5 million, of which nearly three-fourths will be in foreign exchange. The Bank loan will be used entirely to finance foreign exchange expenditures. Contracts have been let with a German firm for the main supply of pipe, and with a United States firm for the pipe-laying and related construction work, after international competitive bidding in conformity with the Bank's guidelines. The German firm which was awarded the pipe supply contract has sub-contracted a sizeable portion of it to an Argentine manufacturer. It is proposed that the proceeds of the loan be applied to the cost of the imported pipe and to a proportion of the construction contract that is substantially less than the foreign exchange component of that contract. Expenditures made after May 1, 1969 for pipe would be eligible for reimbursement as would expen- ditures on engineering services after August 1, 1968; it is estimated that not more than $2 million of the loan will be used to reimburse expenditures made prior to the date of the loan. This recommendation is based on the fact that it was necessary to place orders for the pipe and to make certain down-payments in time for first deliveries of gas to Argentina to take place by August 1970, as called for in the Sales Agreement. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 13. The draft Loan Agreement between the Bank and Compania Yacibol Bogoc Transportadores; the draft Guarantee Agreement between the Republic of Bolivia and the Bank; the draft Guarantee Agreement between Bolivian Gulf Oil Company, Yacimientos Petroliferos Bolivianos and the Bank; the draft Guarantee Agreement between Gulf Oil Corporation and the Bank; the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement and a draft Resolution are being submitted to the Executive Directors separately. The draft Loan Agreement and Guarantee Agreement wJith Bolivia follow the usual Bank practice for this type of project. It should be noted that the draft Loan Agreement provides that YABOG must seek prior Bank approval if it wishes to incur debts exceeding $1 million outstanding at any one time (Section 5.07) or to repay  shareholders' advances on terms and conditions more favorable to the lender than those contained in the Loan Agreemient (Section 5.05). The Loan Agreement also provides that any failure of any party to meet its obligations under the Sales Agreement or under any of the inter-company agreements through which YABOG was established, or is to be operated, or any amendment or abrogation of any of these agreements, or of the agree- ment with the Morgan Guaranty Trust Co. of New York referred to in para.ll above, or of the concession of YABOG, without prior Bank approval, is to be considered an event of default under the Loan (Section 6.02). Under the Guarantee Agreement, the Republic of Bolivia is obligated to take no action which would prevent or interfere with the performance by the Borrower of its obligations under the Loan Agreement, or with the implementation of the Sales Agreement, and to take all action necessary to permit the performance of the said obligations and Agreement (Section 3.05). 14. The Guarantee Agreement between YPFB-BOGCC and the Bank contains an unconditional joint and several guarantee by the two shareholders of the punctual payment of all amounts due the Bank from YABOG (Section 2.01), and of the prompt provision of any additional funds that may be needed to complete the project (Section 2.02). The parties have agreed between themselves that they will share in any payment to the Bank that may be called for under this guarantee, in proportion to their use of the pipe- line; but if either party is unable, for any reason, to contribute its share, the other party must pay the full amount. BOGCC's obligations under this agreement are unconditionally guaranteed by its corporate parent, the Gulf Oil Corporation, in the Guarantee Agreement between Gulf and the Bank (Section 1.01). PART V - THE ECONOMY 15. A report on "Current Economic Situation and Prospects of Bolivia" (14H-189a) wras distributed to the Executive Directors on February l4, 1969. The report concluded that economic performance - measured by increases in real output, savings, investment and public sector revenues - improved significantly in the past decade. Nevertheless, the continuing dependence on tin and other minerals whose market prospects are not good, will limit the savings potential of the economy and keep the budget, the development program and the balance of payments under pressure. If growth is to continue at the present rate of 5 percent per year, Bolivia will need substantial capital inflow and, if the balance of payments is to remain manageable, most external borrowing will have to be on concessional terms. 16. The project being financed by the proposed loan is exceptional in that the gas sales proceeds in dollars will be available directly to service the external borrowing obtained to finance the project. 17. Bolivia suspended payments on its external dollar bonds for several years, but in recent months it has reached agreement with the bondholders on a new schedule of debt service, and payments are to be  resumed in the near future. A problem which has still not been entirely resolved stems from the nationalization of the Bolivian mining properties in 1952. Substantial compensation payments, based on a provisional valua- tion of assets, were made to the former owners between 1953 and 1961, but no payments have been made since. As I reported in April w1hen recommending approval of the IDA credit for the Santa Isabel bydroelectaic project (P-681), the situation regarding the beneficial mTnership cf the various companies involved, the nationality of their owners, and the extent to which claims are still being asserted, is complicated and obscure. I do not consider that this matter should deter action by the Bank on the present proposal. PART VI - COMPLIANCE WITH ARTICLES OF AGREEI4ENT 18. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECODMMENDATION 19. I recommend that the Executive Directors approve the proposed Loan. Robert S. McNamara President Attachments Washington, D.C. June 19, 1969