Equatorial Guinea - Petroleum Sector Technical Assistance Project

Document of The World Bank t T FOR OFFICIAL USE ONLY Report No. P-3401-EG REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT IN AN AMOUNT EQUIVALENT TO US$2.4 MILLION TO THE REPUBLIC OF EQUATORIAL GUINEA FOR A PETROLEUM SECTOR TECHNICAL ASSISTANCE PROJECT November 8, 1982 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 disclesed without World Bank authorization.  CURRENCY EQUIVALENTS Calendar 1981 September 1982 Currency Unit = Epkwele (EK)2/ EK US$1.00 = EK 190.988 EK 225.899 EK1,000 = US$ 5.24 US$ 4.43 WEIGHTS AND MEASURES bpd = barrels per day m3 = cubic meter (6.3 barrels of oil) toe = ton of oil equivalent (about 7.4 barrels of oil) GWh = gigawatt hours, equivalent to 1 million kWh kWh = kilowatt hours MW = megawatts, equivalent to 1000 kilowatts ABBREVIATIONS AND ACRONYMS CONOCO = Continental Oil Company, Inc. DPA = Department of Petroleum Affairs DMH = Directorate of Mines and Hydrocarbons ENEERGE = Empresa Nacional de Energia Elctrica de la Repuiblica de Guinea Ecuatorial (National Electrical Energy Company of the Republic of Equatorial Guinea) EEPGE = Empresa Estatal para la Importaci6n y Commercializaci6n de Productos Petroliferos (State Company for the Importing and Marketing of Petroleum Products) Hispanoil = Spanish National Petroleum Company GEPSA = Guinea Espanola de Petr6leos S.A. (Guinean-Spanish Petroleum Company Ltd.) MIME = Ministry of Industry, Mines and Energy REPUBLIC OF EQUATORIAL GUINEA FISCAL YEAR January 1 to December 31 1/ Plural: Bipkwele. The Epkwele is tied to the Spanish Peseta at the ratio of two Bipkwele to one Peseta.  FOR OFFICIAL USE ONLY EQUATORIAL GUINEA PETROLEUM SECTOR TECHNICAL ASSISTANCE PROJECT CREDIT AND PROJECT SUMMARY Borrower: The Republic of Equatorial Guinea Amount: SDR 2.3 million (US$2.4 million equivalent) Terms: Standard IDA terms Project Description: The project would provide technical assistance to the Government for (a) the initial functioning, within the Presidency, of the Department cf Petroleum Affairs (DPA), responsible for administering the country's petroleum sector, and (b) the strengthening of the overall management of the energy sector. The project would include: (a) Exploration Monitoring: (i) about 46 man- months of the services of experts to assist DPA in evaluating the financial and technical aspects of exploration contracts with oil companies, monitoring companies' activities, processing exploration-related information, and periodically re-evaluating the country's hydrocarbon potential; and (ii) training for government officials in the most important aspects of petroleum exploration and economics, including three internships, at governmental and private- sector institutions abroad. (b) Establishment of an Energy Sector Information System: 8 man-months of consultants' services to assist in the systematic collection and processing of basic data on the energy sector, including energy output, imports, and demand, and preparation of an energy consumption survey. (c) Project Administration: 36 man-months of the services of a full-time resident project administrator who would provide assistance with procurement and disbursement matters, project accounting, and liaison with the non-resident consultants, the various Ministries involved, and the Association. Project Benefits: The proposed project would assist the Government in attracting foreign capital and know-how, leading to intensive hydrocarborn exploration, on equitable terms. In addition, the project would help to 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.  - ii - build tip a competent Government petroleum-affairs agency by providing human and technical resources needed to ensure the maximum exploration of the country's petroleum potential. The establishment of an energy sector information system would provide the Government with the statistical basis necessary to develop rational energy policies and undertake subsequent planning. Project Risks: The present Government is often not well coordinated and has very little experience with the Bank Group. This situation could cause problems in project implementation. This risk has been addressed by the establishment of DPA within the Presidency, where both decision-making power and the country's limited expertise in the sector are concentrated. A second risk is that difficulties may arise in hiring qualified expatriate specialists full- time. This risk is addressed in the project design by recruiting exploration consultants for part-time visits only. A third risk is that difficulties may also arise in recruiting and retaining competent local staff. This risk is addressed by an agreement with the Government on the up-grading of key posts and improving the career-development prospects of administrative staff in the petroleum sector. A fourth risk is that the country's hydrocarbon prospects may not be promising enough to attract companies in sufficient numbers to undertake a meaningful exploration program. In the light of past exploration results and the number of companies that have expressed interest, this risk is considered small. Estimated Cost: Total project cost net of identifiable taxes is estimated at US$2.7 million equivalent, of which US$2.3 million (85 percent) would be foreign exchange. A summary cost table is shown below:  - iii - PROJECT COST SUMMARY (us$ '000) Foreign Local Total Assistance to DPA Consultants' Services 760 110 870 Facilities and Equipment 560 0 560 Local Staff and Support Services 0 120 120 Training (incl. travel expenses) 120 0 120 Subtotal 1,440 230 1,670 Energy Information System Consultants' Services 60 10 70 Facilities and Equipment 5 0 5 Local Staff and Support Services 0 5 5 Subtotal 65 15 80 Project Administration Consultants' Services 260 30 290 Facilities and Equipment 5 0 5 Local Staff and Support Services 0 30 30 Subtotal 265 60 325 Baseline Costs 1,770 305 2,075 Physical Contingencies 180 30 210 Price Contingencies 350 60 410 Subtotal _530 90 620 GRAND TOTAL (Current Prices) 2,300 400 2,700 1/ Includes US$150,000 PPF advance.  - iv - Fore ign Local Total Percent (Us$'00) Financing Plan: IDA 2,300 100 2,400 89 Government - 300 300 11 Total 2,300 400 2,700 100 Estimated Disbursement: Fiscal Year 1983 1984 1985 Annual 600 900 900 Cumulative 600 1,500 2,400 Rate of Return: N.A. Staff Appraisal Report: None prepared. Map: IBRD No. 10259R.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF EQUATORIAL GUINEA FOR A PETROLEUM SECTOR TECHNICAL ASSISTANCE PROJECT 1. I submit the following report and recommendation on a proposed Development Credit to the Republic of Equatorial Guinea for the equivalent of SDR 2.3 million (US$2.4 million) on standard IDA terms, to assist in financing a technical-assistance project. PART I - THE ECONOMY 2. The last economic report, entitled "The Economy of the Republic of Equatorial Guinea--Recent Evolution and Prospects" (Report No. AW-37a) was distributed to the Board on November 27, 1972. Since then, the Bank Group has monitored the economy with the help of IMF reports and several missions, the latest of which took place in September 1982. The findings of these missions have been integrated into this report. A Country Economic Memorandum was prepared in FY82. Political Situation 3. When Equatorial Guinea, a former overseas province of Spain, became independent in October 1968, it was one of the most developed countries in sub-Saharan Africa. During the subsequent 11 years of Macias Nguema's regime, the economy was mismanaged, public administration ceased to function and the population survived at a barely subsistence level. In August 1979, a military junta deposed President Macias and established a Supreme Military Council (Consejo Militar Supremo--CMS) headed by President Lieutenant Colonel Teodoro Obiang Nguema Mbasogo. The new Government has taken steps to restore a measure of democratic process, and the country's political isolation is being overcome gradually as Spain, international organizations, and other countries have resumed their financial and technical cooperation. An international donors' conference took place in April 1982, and a new constitution was approved in a national referendum in August 1982. Economic Potential and Development Constraints 4. Equatorial Guinea covers 28,051 km and consists of two parts: Insular Guinea and Continental Guinea. Insular Guinea comprises five islands: Bioko, on which is located the capital, Malabo, and four smaller islands: Corisco, Big Elobey, Little Elobey, and Annobon. Continental Guinea, named Rio Muni, is bordered on the north by Cameroon and on the south and east by Gabon. At the beginning of the 1970s, Bioko, more developed and urbanized than Continental Guinea, produced approximately half of Equatorial Guinea's GDP and had a per-capita income twice as high as that of Rio Muni. Approximately 80 percent of the total population, estimated at 350,000 at the end of 1981, live in Rio Muni, and about  -2- 17 percent in urban centers. With an estimated per capita income of US$175 in 1981, Equatorial Guinea has recently been classified as a least developed country by the UN. 5. The economy is based almost exclusively on agriculture (including fishing) and forestry. Roughly 80 percent of the population derive their living from agriculture, which accounts for 50 percent of GDP and about 97 percent of merchandise exports. Soils are of fertile volcanic origin. The island of Bioko, where the country's main cash crop, cocoa, is grown, benefits from well-distributed rainfall, whereas Rio Muni, covered with large forests, has a more pronounced dry season. The Gulf of Guinea has abundant fish resources, and Rio Muni offers good resources for river fishing. 6. Cocoa, coffee, and timber have traditionally been the country's main sources of income. Before Independence, high-quality cocoa was produced on some 53,000 ha, with Bioko accounting for 86 percent of the cultivated area. The cocoa was grown on large, mostly foreign-owned plantations (about half the total acreage), on medium-size estates, and on small holdings held by indigenous farmers. Coffee was grown on 60,000 ha in Rio Muni, mainly by smallholders, and also on some 5,000 ha on Bioko. Equatorial Guinea's forestry reserves, covering approximately 1,300,000 ha, of which about 500,000 ha have been partially exploited, represent potentially the country's richest resource, apart from possible future petroleum production. Estimated yields (25-30 m3/ha) are among the highest in West Africa, and okoume, the most valuable species, accounts for roughly 20 percent of production. Preliminary surveys have found encouraging indications of titanium, iron ore, silica, manganese, uranium and alluvial gold. Oil exploration has been going on since the mid-1960s, with a long interruption under the former regime, and the Government has more recently received assistance from Spain, the UN, and the Bank in this sector (paras. 31-38). 7. Though well endowed with natural resources, Equatorial Guinea faces serious development constraints. A very weak public administration and a shortage of the labor needed for operating the cocoa plantations are the most serious obstacles to economic recovery. Shortly after Indepen- dence, many expatriates left, and since then, the country has experienced a severe shortage of administrators, technicians, and managers. During the 1970s, a large part of the educated population was killed, approximately one third of the population fled the country, and the formal education system ceased to function for six or seven years. In addition, the country's development has been hampered by the long distances between Insular and Continental Guinea and by a lack of infrastructure. Past Performance 8. During its short period of independence, Equatorial Guinea's GDP per capita fell sharply, from US$260 in 1970 to about US$175 in 1981. This decrease was caused mainly by the drastic decline of the country's agricultural production. Cocoa exports fell from some 40,000 tons in 1968 to less than 20,000 tons at the beginning of the 1970s, following  - 3 - the departure of the foreign plantation owners, and to about 7,000 tons a year after the exodus of some 30,000-40,000 Nigerian contract workers in the mid-1970s. In an effort to restore cocoa production, the previous Government introduced mandatory labor and brought large numbers of people from Rio Muni to Bioko to work on the state-owned plantations. Inadequate management by civil servants, insufficient and unmotivated labor supply, and a reduced application of insecticides and fungicides led to a further decline in yields and in the area cultivated, and exports fell to a record low of 5,200 metric tons in 1980. Declines in the other agricultural sectors were equally striking. Timber production declined from 360,000 metric tons in 1968 to an annual average of 6,000 tons in the late 1970s, and coffee and palm-oil production virtually disappeared. Basic services in health care, education, and in water and electrical supplies could not be maintained, and large sections of the population, especially in the cities, suffered from malnutrition. Foreign investment stopped and the trading system, operated by state enterprises, broke down. When the Macias Government started seizing harvests without payment, cash crops were almost completely abandoned, and barter trade became the dominant form of exchange. 9. The new Government, though initially not able to decide on a comprehensive development strategy, has taken several steps aimed at revitalizing the economy. During 1980, the former plantation owners were invited back, cocoa producer prices were raised from EK 85/kg to EK 190/kg, and minimum agricultural wages were almost doubled, from EK 4,500 to EK 8,500. To date, some of the large estate owners have returned and have started to rehabilitate, within the limits of the existing labor supply, small areas of their plantations. But since many of the forcibly recruited plantation laborers returned to Rio Muni after the coup d'etat and show no inclination to go back to Bioko, even at wage offers considerably above the fixed minimum level, labor remains scarce, and plantation owners hesitate to undertake rehabilitation investments. Uncertainties as to the question of land tenure have also slowed the rehabilitation of the cocoa sector. Consequently, cocoa exports have remained at a low level (some 8,000 tons in 1981). Timber production, though having recovered from the low levels of the 1970s to some 70,000 tons in 1981, has remained far below its potential, estimated at 300,000 tons a year in a recent FAO study. Difficult road conditions, a lack of capital and weaknesses in the Government's forestry administration explain, to a large extent, the slow recovery of recorded wood production. Domestic food production has been increasing steadily since 1980, as farmers have returned to cultivating their fields, and fishermen have resumed artisanal fishing. Some distribution problems notwithstanding, basic necessities have reappeared at the markets and in the shops. Budgetary developments 10. The devastation of Equatorial Guinea's economy was accompanied by the complete disarray of its public finances. Under the Macias regime, public financial transactions were recorded only sporadically, and the accounts of the Treasury, the Central Bank, and public enterprises were not kept separate. The new Government reintroduced regular budgetary  - 4 - and banking procedures with technical assistance from the IMF, and in April 1980, the first formal budget since 1974 was enacted. The economic and financial stabilization program, agreed upon with the IMF in mid- 1980 for a stand-by arrangement, included several measures aimed at establish- ing financial discipline. The two main public import and trade enterprises were to be converted into autonomous government-owned or mixed enterprises, independent of government funding, the numerous government accounts in the Central Bank were to be consolidated into one single revenue and expenditure account, the customs administration at Bata, Rio Muni's economic urban center, was to be strengthened, and, most importantly, all expenditures were to be strictly controlled with the help of a high-level Government committee. Although some progress was initially made in these areas the Government has not succeeded in fully implementing the policy measures agreed upon. 11. Because of uncertainties about the extent and speed of the economic recovery, rather large differences between budgeted and actual revenues and expenditures occurred in 1980. Actual revenues, amounting to EK 2,706 million, were almost 40 percent higher than budgeted, mainly because of unexpected revenues which had been amassed by the previous regime and because of revenues from merchandise sales by the public enterprises, the accounts of which had not yet been separated from the Treasury. Tax revenues were considerably lower than budgeted, because there were delays in implementing new tax measures, because several import tariffs and tax rates were set lower than foreseen in the stabilization program, and because tax collection was inefficient. Expenditures, on the other hand, were almost twice as high as budgeted because of large extra-budgetary payments. Two thirds of total expenditures, estimated at EK 4,150 million, were made outside the budget, and included outlays for reconstructing government buildings and a road, as well as subsidies to various public enterprises. Most of the deficit of EK 1,444 million was financed by the Central Bank. Balance of Payments 12. Except for a few years during the 1970s when exports slumped, Equatorial Guinea's balance of payments had recorded surpluses. The current account surpluses remained small, however, and foreign trade became increasingly restricted, as foreign financing became difficult to acquire. International transactions were handled by the Government or by state enterprises, and only the most essential goods were imported. When the new Government liberalized the system of import licenses in 1980, Equatorial Guinea's balance of payments deteriorated drastically. Although the country's currency, the epkwele (EK) had been devalued by 50 percent in relation to the Spanish peseta in mid-1980, following the wage increases in the agricultural sector (para. 9), exports fell to a record low level in 1980. Imports of foodstuffs and of intermediate and capital goods increased from an annual average of US$16 million during the period 1977-79 to an annual average of US$43 million during the period 1980-81, and the annual current account surpluses of US$9 million turned into deficits of US$24 million. Capital inflows, especially from Spain, increased considerably, and the overall balance-of-payments deficits  - 5 - amounted to US$14 million a year during 1980-81, of which more than 80 percent was financed by the IMF. At the end of 1981, gross foreign reserves were estimated at approximately US$20 million, or about five months of merchandise imports. Prospects for balance-of-payments surpluses in the second half of the 1980s are good, since foreign exchange earnings from timber as well as from oil resources are expected increasingly to offset the pressures of rapidly increasing imports. The External Debt 13. At the end of 1980, Equatorial Guinea's total outstanding debt (including undisbursed debt) was estimated at US$76 million, of which US$41 million had been disbursed. Debt service payments were estimated at US$2.3 million in 1981, and at about US$3.4 million a year over the next three years. The country's debt service ratio, i.e. the country's scheduled debt service obligations in relation to its export earnings from goods and services, was estimated at 8 percent in 1981 and is expected to amount to close to 10 percent in the following three years, if cocoa and wood exports reach their projected levels. Development Strategy and Investment Plan 14. The absence of a functioning civil service at the time of the sudden takeover of power in late 1979 made it difficult for the new Government to pursue a comprehensive development strategy. During the first two years of its rule, the Government concentrated on returning the country to political stability and on reestablishing the legal and administrative framework needed to attract and coordinate the foreign aid expected. The Government has stated that it counts on the private sector to play a significant role in the country's reconstruction process, but a shortage of entrepreneurial skills and the authorities' hesitation to implement rigorously a development approach based on private initiative has so far left most economic activities in the hands of state enterprises or under the Government's close control. Although a series of policy measures (including the creation of the Technical Cabinet / Cabinete Tecnico /, a high-level interministerial committee that coordinates and monitors economic policy; the promulgation of a foreign investment law, and a new customs and capital control law; and the conclusion of several cooperation agreements with European and Latin American countries) have created a favorable climate for the country's economic reconstruction, investments have been made at only a moderate pace because of the very limited absorptive capacity. 15. With UNDP assistance, the Government presented a short-term economic reconstruction and development plan at an international donors' conference in Geneva in April 1982. The Reconstruction Program: 1982-84 forms a link between the emergency measures taken in 1980 and 1981 and the medium-term development plans to be prepared from 1985 onwards. The Program aims at a revitalization of domestic food production, at stimulating the production of export crops, and at providing a basic infrastructure. Planned investments during 1982-84 amount to US$141 million (in constant 1981 US dollars), some 80 percent of which the Government  - 6 - considers as priority projects. About 20 percent of the total planned investment of the Reconstruction Program has been earmarked for projects in 1982, about 30 percent for 1983, and close to half of the total amount for 1984. The investment program seems overly optimistic with regard to its volume, on grounds both of available financing and of absorptive capacity. It is not likely that more than one third of the overall program could be implemented over the next three years. The program allocates a high share of the total amount to infrastructure and housing (51 percent) at the expense of agriculture (about 23 percent) and industry, mining and energy (9 percent), with the remaining 17 percent being reserved for education, health and other social and administrative support projects. 16. In the agricultural sector, the Government has given first priority to the rehabilitation of the cocoa sector. Technical and financial assistance to smallholders, made available since the beginning of 1982 by the UN Capital Development Fund and several donor countries, and a continuation of the cocoa rehabilitation project (5,000 ha) financed by the African Development Bank are expected to lead to an increase in cocoa production from 8,000 tons in 1981 to 16,000 tons a year by the end of the Reconstruction Program in 1984. In order to expand cocoa production further, the Government has begun, with the Bank's assistance, to study in detail all aspects, including the labor question, of a possible large-scale cocoa/coffee rehabilitation project. The scope and nature of such a project, currently being prepared by a team of consultants financed with an IDA PPF advance, will depend crucially on the availability of foreign labor, since the scope for mechanizing cocoa production is very limited. In the forestry sector, the Government has received technical assistance from FAO, and a new forestry law is expected to stimulate investments and improve the operating climate for foreign companies in that sector. Timber production could increase from some 70,000 tons in 1981 to about 140,000 tons a year by 1984, and to 400,000 tons a year in the long term, provided that (a) the necessary infrastructure be put into place, and (b) the national forestry administration be considerably strengthened. About 4 percent of the total investment program for 1982-84 has been reserved for the energy sector, where projects aim at providing Equatorial Guinea's population centers with electricity and at defining an overall energy policy, taking into account the country's hydroelectric resources. The Government has given high priority to the development of the country's oil resources, the foreign exchange earnings from which are expected to speed up the country's economic reconstruction. Prospects 17. After a decade of economic decline, the prospects for a recovery of Equatorial Guinea's economy in the medium term are good. Production of the country's export commodities can be expected to increase steadily, providing a base for developing domestic food production and marketing. At a later stage, a small-scale manufacturing industry could be reestablished around cocoa, coffee, and timber production. In addition, oil and other mineral resources, if they materialize, will substantially raise the country's medium-term development potential. Equatorial Guinea's very limited capacity for identifying, planning, and implementing investment  - 7 - projects is likely to continue to be the country's most serious development constraint for some time. The substantial technical assistance provided by the international community is, however, expected to mitigate this obstacle gradually in the course of the next few years. 18. In view of the country's poverty and its public-finance difficulties, Equatorial Guinea is not creditworthy for conventional borrowing, and donors should extend their assistance on highly concessional terms. During the economy's recovery phase in the early 1980s, public savings net of debt service are likely to be negative. The Government's contribution to public investments will, therefore, remain modest at best for several years. If the country's administrative capacity continues to improve, foreign donors should be prepared to assist new development projects, financing a high proportion of project costs, including some local cost financing. PART II - BANK GROUP OPERATIONS IN EQUATORIAL GUINEA 19. The Bank Group has had only one project in Equatorial Guinea, a Highways Project (Credit 362-EG) for which an IDA Credit for US$2.0 million equivalent was approved in March 1973. Only minimal disbursements were made under the project, and the Credit was cancelled in April 1976 at the Government's request. Economic mismanagement, chaotic public administration, and lack of even elementary planning and investment program- ming, which characterized the previous regime, made it impossible for the Bank Group to undertake a meaningful dialogue with the Government, much less to finance projects, although periodic efforts were made to ascertain whether the situation had changed sufficiently to recommence a lending program. 20. Under the new Government, the Bank Group has cautiously resumed activities in the country, starting with the execution of a UNDP-financed technical assistance project in the petroleum sector (para. 31, 34). A cocoa/coffee rehabilitation project was identified in mid-1981, and a request for an advance from the Project Preparation Facility for the preparation of the project was approved in November 1981. A preparation mission visited the country in September/October 1982; their report is expected by mid-December 1982. A highways project mission visited the country in March 1981 and tentatively identified a new project in that sector, but administrative problems preclude advancing with such a project at the present time. A Bank forestry specialist visited the country in February 1982, and a forestry sector memorandum is under preparation which may suggest possible Bank Group assistance to that sector. Finally, the Bank Group took an active role in assisting the Government and UNDP in the preparation of an international donors' conference (para. 15), which took place in April 1982.  -8- PART III - THE ENERGY SECTOR Resource Base, Output, and Demand 21. Equatorial Guinea's energy resource base is reasonably diversified but little developed. Dense forests covering 1.0 million ha provide the most important energy source. The hydro potential on Bioko Island is estimated at 33 MW, of which currently only 0.5 MW are used, but Rio Muni's hydro potential, completely unutilized at present, may be even larger than that on Bioko. There is at present no production of hydrocarbons, but past offshore drilling has encountered encouraging oil shows. The solar energy potential is also significant but is not being used. 22. Over the last decade, domestic energy output and use have been severely depressed by economic stagnation. Overall energy consumption in 1980 is estimated to have been 65,000 toe, or 0.20 toe per capita. Petroleum product consumption accounts for less than 60 kg per capita, compared to an average consumption of 80-100 kg per capita in sub-Saharan African countries. The major source of energy consumed is firewood, which meets nearly 80 percent of overall energy needs and virtually 100 percent of the energy needs of the rural sector, including agroindustries (mainly cocoa drying). Very little charcoal is used. Imports of petroleum products cover all commercial energy requirements. The public electricity system, operated by the Empresa Nacional de Energia Electrica de la Republica de Guinea Ecuatorial (ENEERGE), depends largely on small diesel generators and covers only three cities (Malabo and Luba on Bioko, Bata in Rio Muni). The system is poorly maintained, and supplies are frequently interrupted. Only 4.3 MW of the 8.8 MW of total installed capacity are in operating condition, and transmission losses are close to 35 percent of generation. Because of the unreliability of the public system, a large number of customers have increasingly relied on private generators. Electricity consumption in 1980 probably did not exceed 45 kWh per capita, a figure which is among the lowest in sub-Saharan Africa. Sector Institutions, Policies, and Issues 23. The Presidency holds final responsibility for policy decisions affecting the energy sector. It has assumed direct control, in petroleum matters, over the Directorate of Mines and Hydrocarbons (DMH) which adminis- tratively is located in the Ministry of Industry, Mines and Energy (MIME). The Presidency also supervises the Cabinete Tecnico, which is responsible, among other things, for the evaluation of foreign petroleum companies' bids for hydrocarbon exploration. MIME, through its Directorate of Industry, manages the electricity utility ENEERGE, although there are plans to transform ENEERGE into an autonomous public enterprise. The state petroleum importing and marketing company, EEPGE, which until recently was directly controlled by the Ministry of Finance and Commerce, has already been transformed into an autonomous public enterprise. The Ministries of Development and of Finance and Commerce also play a role in pricing and investment decisions affecting the energy sector. The newly created Department of Petroleum Affairs (DPA) within the Presidency ties together the hitherto dispersed--and sometimes conflicting--Ministerial responsibilities for petroleum policy (para 34).  -9- Investment Priorities 24. For lack of trained personnel and of the most basic data on energy, the Government has not yet devised a coherent development plan for the energy sector. In view of the rapidly growing demand for commercial energy resulting from resumed economic activity, the Government is giving priority to restoring a reliable supply of electricity. The Malabo distribu- tion system is being improved and the Musola hydropower plant (in central Bioko) repaired, with financing of US$5 million from the European Development Fund and UNDP. For future expansion, the Government is now giving priority to hydropower development, based on a survey of the country's hydro potential being carried out by Electricite de France. A 3.2 MW hydro scheme under construction in Rio Muni should be completed in 1983. The Government's policy regarding petroleum is to encourage exploration as fast as possible in the hope of eventually meeting domestic energy requirements and exploiting a new source of export earnings. Other than a preliminary review of the forestry potential by FAO (para. 9), little attention has yet been devoted to renewable sources of energy. In particular, the possibility of using the country's forestry reserves more effectively for energy purposes has not yet been carefully considered. With the expected rise in commercial energy consumption, the Government will be, within a few years, faced with increasingly complex issues in the sector, such as ensuring adequate supplies, determining an appropriate mix of supplies, and ensuring efficient energy use. The proposed project would assist the Government in establishing a reliable energy data system that would provide key inputs for making decisions concerning the energy sector (para. 43). Energy Pricing 25. Energy pricing is discussed in detail in Annex V to this report. The prices of petroleum products are set by the Presidency on the basis of proposals from EEPGE (para. 23). At present, they are in line with price levels prevailing in other African countries. There is some subsidiza- tion of kerosene, which, however, is justified by social objectives and is more than compensated for by the surplus obtained from the sale of other products. Electricity tariffs have been insufficient to cover costs, and, in practice, most residential users pay a flat fee irrespective of their actual consumption. The Association has pointed out this issue to the Government but is not insisting on corrective action as a condition of proceeding with the proposed project. Since the proposed project focuses mainly on petroleum exploration, it would not be an appropriate vehicle for a discussion of electricity pricing. Once more relevant data are available, a detailed energy pricing analysis can be undertaken, and energy pricing issues can be addressed in the Association's dialogue with the Government. The Petroleum Sub-sector 26. All petroleum products consumed are imported. As a result of the re-opening of the country following the coup d'etat in late 1979, imports of automobiles and fuels increased dramatically, with the result  - 10 - that petroleum consumption amounted in 1980 to about 18,400 tons, which represented an increase of nearly 70 percent over the preceding year's level of consumption. Gas oil accounts for the largest share of consumption (42% in 1980) because of its use in power generation and transport. Kerosene (22% of consumption) is essentially used for lighting and cooking. The share of gasoline in overall consumption is relatively small (21%), because of low car density, whereas aviation fuels account for 15% of overall consumption, mostly in the form of bunker sales to foreign airlines. There is no consumption of liquified petroleum gas (LPG) in the country. As regards consumption by sector, transport accounts for 35 percent; power generation and residential-commercial consumption, about 30 percent each; and industrial consumption, including agroindustries, 5 percent. The island of Bioko accounts for about 60 percent of total consumption. 27. Imported petroleum products have in the past originated almost entirely in the USSR. Recently, EEPGE has also bought products from Spain, Cameroon, and Gabon, on a spot basis. EEPGE contracts for petroleum products, following approval of the required foreign exchange allocations by the Presidency. EEPGE is also responsible for storing, transporting, and distributing products. Storage capacity amounts to 15,500 tons in Bioko and 10,300 tons in Rio Muni, equivalent to 18 months of consumption, but actual inventories are much lower. 28. As a result of economic stagnation and of the scarcity of foreign exchange, petroleum imports were severely restricted during the 1970s. Even in 1980, the total value of petroleum imports amounted to only US$5 million. The figure is expected to increase, however, to at least US$8 million in 1981, equivalent to about 30 percent of that year's foreign exchange earnings. Because of small and irregular shipments, CIF import prices are 30-35 percent above international refinery prices. With the expected economic recovery, petroleum imports are likely to increase significantly. Assuming a growth of domestic consumption of petroleum products averaging 5 percent p.a. throughout the 1980s, imports may amount to US$14.5 million in 1985 and US$28 million in 1990 (current prices). Expenditures of that magnitude would preempt a growing share of export earnings, unless indigenous crude production has started by then and exports of crude are compensating for petroleum-product imports. Geological Setting 2 29. Equatorial Guinea's offshore area, totaling about 13,450 km includes parts of three distinct sedimentary basins. One of these, lying north of Bioko Island, is an extension of the Niger Delta Basin, which contains a large number of fields in Nigeria and Cameroon producing from tertiary and cretaceous sandstone reservoirs on structures associated with gravity faults (produced by sedimentary loading of underlying plastic shales). The offshore area south of Bioko Island is part of the seaward extension of the Douala Basin of Cameroon. It is similar in most respects to the Niger Delta Basin, and several gas fields have been discovered both on-and offshore. The remaining basins, lying offshore from Rio Muni, are part of the northern extension of the Gabon Basin, which is productive to the south in Gabon, principally from tertiary and cretaceous  - 11 - sandstone reservoirs associated with structures induced by flowage of an underlying salt formation into pillows, domes, and ridges. Some 30 sizeable salt structures have been identified offshore from Rio Muni after seismic surveys in an area north of Corisco Island. Although not much geological work has been conducted onshore on Rio Muni, a shallow basement indicates little petroleum potential in this area. Government Strategy for Petroleum Exploration 30. In the late 1960s and early 1970s, a first round of exploration on Equatorial Guinea's continental shelf created substantial interest among oil companies. Four groups of companies spent about US$20 million to acquire 8,000 km of seismic lines and 6,000 km of airmag lines and to drill seven wells, three of which had oil shows. Exploration was interrupted in the mid-1970s because of a controversy with Gabon concerning the delimitation of offshore waters (para. 35) and a deteriorating investment climate. Shortly after the new Government took power in August 1979 and indicated its intention to encourage foreign investment, foreign oil companies approached the Government requesting exploration permits offshore. An agreement with Hispanoil materialized as part of the technical assistance provided by Spain to Equatorial Guinea. A mixed company, Guinea-Espanola de Petroleos, S.A. (GEPSA), was created, owned in equal shares by the Government of Equatorial Guinea and Hispanoil. With Hispanoil financing, GEPSA undertook a seismic survey of the offshore areas and subsequently requested a contract covering the entire area offshore north of Bioko. The Govern ent has decided to grant four blocks (covering approximately 1800 km ) to GEPSA, and negotiations have been completed within the framework of the newly enacted law (para. 33). 31. The Government also sought UNDP and World Bank assistance to promote petroleum exploration. Two UNDP grants (totaling US$0.6 million) for which the Bank was the executing agency, were extended in June 1980 and July 1981, respectively, to finance technical assistance. The UNDP grants are expected to be fully disbursed by mid-1983. 32. The implementation of the UNDP project has proceeded satisfactorily. As part of the project, legal consultants helped in preparing the legal and contractual framework for hydrocarbon exploration and production; the results of their assistance were a national Hydrocarbon Law, promulgated on June 23, 1981, and an annexed production-sharing model contract, finalized in January 1982. Exploration consultants assisted in the compilation, review, and reinterpretation of existing geological and geophysical data on Equatorial Guinea's basins. The exploration consultants also assisted in promoting the country's hydrocarbon potential to the petroleum industry by preparing a bid invitation document, which was finalized in February 1982 for sale to interested oil companies to enable them to prepare bids for exploration acreage. The Government has also retained an experienced bid evaluation specialist (for intermittent periods totalling three man- months, starting in October 1981) whose services (including reviewing the technical and financial aspects of draft contracts with oil companies) would be extended and financed under the proposed project.  - 12 - 33. The Hydrocarbon Law of June 23, 1981, and its annex, the model production-sharing contract, provide for exclusive exploration rights for an initial five-year term; these rights can be renewed twice, for one year each, for a maximum period of seven years. The law and the model contract provide that 40 percent of the permit surface must be relinquished at the end of the third year and that an additional 20 percent of the original permit surface must be relinquished at the end of the fifth year. The holders of contracts are to undertake exploration activities in accordance with an agreed work program. If petroleum reserves are discovered, production permits may be granted for an initial term of 20 years after the start of production. The model production-sharing contract sets royalties at 10 percent each for oil and gas, and income tax at 45 percent. Signature bonuses, work commitments, and the Government's share in production, however, are to be established for each exploration block through a process of bidding by the oil companies for exploration/produc- tion rights in that block. These terms provide a favorable investment framework while protecting the country's interests. The text of the Hydrocarbon Law and model contract has been distributed to about 50 oil companies that have expressed interest in participating in the bidding. Following the release of seismic data by Hispanoil in February 1982, the distribution of bidding documents and the sale of geological and geophysical data packages began and is still under way. In August 1982, the Government issued a decree authorizing international competitive bidding for exploration rights in the offshore areas. The date of bid submittal and opening will be announced by the Government during the next few weeks with at least 45 days advance notice. It is expected that contract negotiations will proceed with the oil companies who are successful bidders during the first quarter of 1983. 34. At the same time as it executed the UNDP-financed project, the Association reviewed with the Government the institutional arrangements for monitoring hydrocarbon exploration, which until recently was the responsibility of MIME's Directorate of Mines and Hydrocarbons (DMH) (para. 23). The Directorate was ill-equipped for this task: in addition to its director, a mining engineer, it had only two professional staff with a background in petroleum and had no decision-making power. In view of the substantial interest of foreign oil companies and the need to deal with them effectively at a high and interministerial level, and in order to establish an effective administration of hydrocarbon exploration, the Government created (by Decree-Law No. 2/1982 of April 22, 1982) a Department of Petroleum Affairs (DPA) within the Presidency and transferred DMH to the Presidency, where it has become part of DPA. DPA's chief reports to the Technical Cabinet, a high-level advisory body that includes representatives of the Ministries of Finance and Commerce, Planning, MIME, and the Presidency. The Technical Cabinet meets regularly and receives all relevant information, provides advice to DPA's head, and coordinates the policies of the Ministries concerned. This arrangement centralizes technical capacity and decision-making power in the Presidency but allows other Ministries involved the possibility of voicing their concerns. DPA's chief, Mr. Marcelino Owono Nguema Onguene, was appointed by Decree-Law No. 19/1982 of May 18, 1982.  - 13 - The Border Question 35. Before Independence, the offshore borders between Equatorial Guinea's islands and three of the country's neighbors--Nigeria, Cameroon, and Gabon--were not clearly defined, as this was considered unimportant. Now that petroleum may be found offshore, the borders can become critically important. The Association is aware that there are frequently ambiguities and controversies over the exact borders in offshore areas, and that such questions have arisen between Equatorial Guinea and some of its neighbors. The Association takes no position in these controversies, and is not financing any physical investments in the area concerned and the Association has recommended to the Government that it formally disclose the existence of conflicting claims to the oil companies. The technical assistance to be provided under the proposed project would not have the function of advising on the legal or other aspects of the conflicting territorial claims. The Conoco Question 36. Conoco (Continental Oil Company, Inc.) had been awarded two blocks of acreage by Spain when Equatorial Guinea was still a Spanish colony. One of the blocks is in the area claimed by Gabon. When Gabon in 1970 issued an exploration permit to other oil companies covering much of the same area, Conoco ceased the mandatory exploration activities in that block. The Government claims that Conoco did not fulfill its contractual obligations, that its concessions therefore terminated, and that Conoco therefore no longer has any claim on either of the two blocks. Conoco claims that force majeure prevented it from carrying out exploration activities in the contested border area, and that it could not work in the other block because normal business operations became impossible under the Macias regime in Equatorial Guinea. The Association has pointed out to the Government of Equatorial Guinea that Conoco's claim to the two blocks, if left unresolved, could lead to less attractive bids on the two blocks from other companies. Conoco and the Government are at present negotiating in an attempt to resolve the matter amicably. The Association takes no position as to the substance of this controversy. In this case, as well as in the border issue, the Association is not financing any physical investments in the affected areas, and the consultants to be financed under the proposed project would not have the function of advising on the legal or other aspects of Conoco's claims. 37. The planned assistance to Equatorial Guinea under the proposed project therefore properly takes into account the position taken by the Borrower as well as the interests of the other member countries of the Association concerned. The Association's Role 38. Equatorial Guinea is entering a decisive phase in the development of its hydrocarbon potential. As executing agency of the UNDP-financed project, and in the course of preparing the proposed project, the Bank has been instrumental in helping the Government to devise and implement  - 14 - a strategy aimed at attracting foreign companies to undertake hydrocarbon exploration on equitable terms. The success of the strategy will depend to a large extent on the administrative capacity of the Government to manage the sector, including the bid evaluation. UNDP funds will run out by mid-1983 (para. 31). The Association's role under the proposed project would be to finance the assistance required to complete the bidding process, furnish technical and financial advice during negotiations with the oil companies, and monitor the activities of the companies once their exploration/production activities have started. A more important long- term role for the Association is to assist in developing the institutional basis through which the Government will eventually be able, largely on its own, to (i) conduct further contract negotiations, (ii) monitor oil companies' activities on a systematic basis, and (iii) undertake planning for the energy sector. PART IV - THE PROJECT Introduction 39. The proposed project was identified in May 1981 and was appraised in November 1981. Project preparation was undertaken in the course of supervising the UNDP-financed technical assistance project in the petroleum sector and was partly financed through a PPF advance of US$150,000 extended in April 1982, of which US$4,500 had been disbursed by July 1982. Credit negotiations were held in Malabo in September 1982. The country delegation was headed by Mr. Guillermo Nguena Ela, Technical Secretary. A credit and project summary appears at the beginning of this report, and a supple- mentary project data sheet is given in Annex III. No staff Appraisal Report has been prepared. Project Objectives 40. Under the proposed project, the technical assistance provided to Equatorial Guinea under the UNDP-financed, Bank-executed project for promoting exploration activities would be continued and expanded. The proposed project would provide the Government with the institutional structure and technical capability to monitor the activities of the petroleum companies, and it would strengthen the overall administration of the energy sector. Its immediate objectives would be to assist Equatorial Guinea in: (a) strengthening the Department of Petroleum Affairs (DPA) within the Presidency (paras. 23 and 34) enabling it to evaluate and interpret exploration data, negotiate with oil companies, and monitor operating companies' activities; and (b) preparing an energy data base, a prerequisite for planning and policy-making in the energy sector.  - 15 - Project Description 41. The project would consist of the following components, which are further described below: (a) exploration monitoring; (b) the establish- ment of an energy-sector information system; (c) project administration; and (d) training. 42. Exploration Monitoring. Consultants would continue and expand the activities started under the UNDP-financed project. They would assist DPA in evaluating the financial and technical aspects of the exploration contracts and in monitoring the oil companies' exploration-related information submitted by operating companies. The component would consist of the services (about 46 man-months) of (i) exploration consultants, including an explorationist as project leader, and (ii) geophysicists and petroleum engineers, as required. The exploration consultants would also re-evaluate annually during 1983-85 the country's hydrocarbon potential, as additional geological data are obtained. The equipment (special copying machines for logs and seismic profiles, storage for geological samples, a core cutter and a core plugging machine) and facilities (including office units and furniture) necessary for DPA's initial operations would be provided under the project, as would four vehicles. 43. The Establishment of an Energy-Sector Information System. Consultants would help establish a data base on energy output, imports, and demand. They would also help prepare an energy consumption survey, which would be undertaken in coordination with the UNDP-financed and -sponsored census scheduled for early 1983. The preparation and undertaking of this survey would be carried out jointly with the UN-financed experts in charge of the census. The completion of this task would provide reliable statistical information, hitherto lacking, on the energy sector, as well as recommendations on (i) the need for further technical assistance in organizing energy-related statistical services, and (ii) the methodological and technical aspects of energy data collection. Eight man-months of consultants' services would be provided for these tasks. Equipment to file, reproduce, and tabulate data for the new information system would also be provided. Assurances have been obtained that the Government would consult with the Association on the conclusions and recommendations of the consultants, particularly before implementing any recommendation with respect to the need for further technical assistance (Section 3.02(c), draft Development Credit Agreement). An assurance has also been obtained that by June 30, 1984, at the latest, the Government would inform the Association of the concrete measures for establishing a permanent energy information system (Section 3.06, draft Development Credit Agreement). 44. Project Administration. The Government's lack of qualified staff, inexperience with Bank Group procedures, and generally weak administra- tive procedures would make it necessary to provide a resident project administrator for a total period of about 36 man-months. A suitable candidate was identified and started work in Equatorial Guinea with financing from an advance from the Project Preparation Facility. He will be responsible for assisting with project administration, particularly with (a) procurement, (b) the keeping of project accounts, (c) the preparation of withdrawal  - 16 - applications, and (d) liaison with the non-resident consultants, the various Ministries involved, and the Association. 45. Training. The terms of reference for all consultants (exploration consultants, energy-information-system consultants, and the administrator) would include the on-the-job training of local counterpart staff, primarily staff with an educational background in petroleum affairs and/or having participated in foreign training financed under the UNDP project. In addition, three internships would be provided to train Government officials in the most important aspects of petroleum exploration and economics (such as the principles of petroleum geology, exploration tec