Morocco - Petroleum Exploration and Essaouira Appraisal Project

Document of The World Bank / FOR OFFICIAL USE ONLY Report No. 4283-MOR STAFF APPRAISAL REPORT MOROCCO PETROLEUM EXPLORATION AND ESSAOUIRA APPRAISAL REPORT April 4, 1983 Energy Department Petroleum Projects I This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS 1 Dirham = US$0.16 6.3 Dirhams = US$1.00 (as of November 1, 1982) FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES 1 inch (in) = 2.54 centimeters (cm) 1 kilometer (km) = 1,000 meters (m) = 0.612 miles (mi) 1 square kilometer (km2) 100 hectares (ha) = 0.3861 sq miles I barrel (bbl) 42 US gallons = 159.0 liters BD barrel per day MCF 1,000 standard cubic feet (SCF) of gas MMCF 1 million SCF MMCFD = 1 million SCF daily I BCF = 1 billion SCF I TCF = I trillion SCF I ton (T) 1,000 kilograms (kg) = 2,205 pounds Tpy = ton per year I ton of crude oil eqivalent (TOE) = 1.0 ton of crude oil 41 MCF of natural gas 1 kilocalorie (Kcal) 3.968 British thermal units (Btu) 1 kilowatt-hour (kWh) = 860 Kcal 1 megawatt (MW) = 1,000 kilowatts (kW) 1 gigawatt hour (GWh) I million kWh o0API = American Petroleum Institute degrees (API) gravity psi = pounds per square inch PRINCIPAL ABBREVIATIONS AND ACRONYMS USED BRPM - Bureau de Recherches et de Participations MEM - Ministry of Energy and Mines ONAREP - Office National de Recherches et Exploitation Petrolieres SCP - Societe Cherifienne des Petroles  FOR OFFICIAL USE ONLY MOROCCO PETROLEUM EXPLORATION AND ESSAOUIRA APPRAISAL PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. THE ENERGY SECTOR. ........................ 1 Background ..................................... 1 Energy Resources .. 2 Energy Consumption .. 3 Energy Supply .........................5 S Energy Conservation and Pricing . . 7 Sector Institutions .. 8 Sector Investment, Policy and Planning . . 9 II. THE PETROLEUM EXPLORATION SECTOR ....................... 10 Introduction ......10 Petroleum Geology and Prospectiveness. 10 Petroleum Legislation and Policy .............. 11 Past Exploration Activity ............................ 12 Current Petroleum Exploration Investment Strategy .. 15 The Role of the Bank in the Petroleum Subsector. . 15 III. THE PROJECT ..16 Background ..16 Gas Potential in the Meskala Area . .18 Exploration Objectives and Project Design. 18 Project Objectives and Description . . 20 Project Implementation . . .22 Implementation Schedule . ............... 24 Project Costs ...24 Project Financing . . .25 Allocation and Disbursement of Bank Loan . . .27 Procurement ... 27 Training ... 28 Reporting Requirements . . .28 Ecology and Safetye ..................................... 29 This report is based on the findings of a mission that visited Morocco in November 1982 and was prepared by Ms. I. Zurayk and Messrs. A. El-Mekkawy, T. Fitzgerald, A. Smit of the Energy Department. The chapter on the energy sector is also based on the findings of the UNDP/World Bank Morocco Energy Assessment (Report No. 4157-MOR).. 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.  Table of Contents (contd.) IV. PROJECT RISKS AND JUSTIFICATION ........................ 29 V. THE BORROWER ............................................ 31 Background .............................................. 31 Statutory Functions and Administration .................. 31 Management and Functional Structure ..................... 32 Institutional Capabilities, Staffing and Training ....... 33 Accounts, Control and Audit ............................. 34 The Institutional Study ................................. 35 Insurance ............................................... 36 VI. FINANCIAL ASPECTS ...................................... 37 Current Financial Position .............................. 37 Future Finances ......................................... 38 VII. AGREEMENTS REACHED .................................... 40 ANNEXES 1.1 Principal Power Stations 1.2 Alternative Primary Energy Supply Patterns and Projected Import Costs 1.3 Projections of Potential Markets for "New" Natural Gas and Coal Imports 1980-95 Costs 1.4 Commercial Energy Prices 2.1 Geology and Exploration History and Geological Cross Section 3.1 Proposed Well Locations and Objectives 3.2 Agreed Training Program 3.3 Project Implementation Schedule 3.4 Detailed Cost Estimate 3.5 Estimated Schedule of Disbursement 4.1 Meskala Reserves and Production Scenarios 5.1 ONAREP Organization Charts 6.1 ONAREP: Statements of Sources and Application of Funds, 1982-84 and Balance Sheets, 1982-84 7.1 Documents Available in the Project File MAPS IBRD 17122, 16880R and 16879R1  I. THE ENERGY SECTOR Background 1.01 Morocco suffers from a drastic imbalance between domestic production and consumption of both commercial and traditional forms of energy. On the commercial side, in 1981, primary production amounted to about 0.69 million TOE (from coal (51%), hydropower (37%), natural gas (9%), and oil (3%)). This compared with total domestic demand for commercial energy of about 4.75 million TOE. As in the past, the deficit was made up almost entirely by oil imports, which constituted about 85% of supply and absorbed about 49% of Morocco's export earnings. Commercial Energy Balance 1981 (Thousand TOE) Natural Coal Gas Oil Electricity Total Primary Production 352 64 19 254 689 Imports 27 - 4,698 - 4,725 Stock Changes 48 - -225 - -177 Supply 427 64 4,492 254 5,237 Thermal Generation -345 - -790 1,115 -20 Non-energy uses - 225 - 225 Exports 30 - 216 - 246 Losses - 24 283 198 505 Final consumption 52 40 2,978 1,171 4,241 Demand 82 64 3,702 1,369 5,217 1.02 Demand for traditional energy (fuelwood, charcoal, agricultural residues, etc.) amounted to about 2.60 million TOE in 1981, or about 35% of Morocco's overall demand for commercial and traditional energy. To satisfy this demand, the rate at which wood is extracted from the country's forests currently exceeds the rate of natural growth by a factor of about three. 1.03 The rising oil bill which exceeded $1.0 billion in 1981 has been a major reason for a marked deterioration in Morocco's overall economic performance in the past several years. The Government is attempting to curb the growth of energy demand through price increases and an active campaign to induce energy savings. In an effort to expedite development of domestic energy supplies, it has also begun to implement a number of important investments in petroleum exploration, expansion of hydroelectric power generation capacity, the development of the oil shale deposits, and reforestation. 1.04 In view of the limits on available coal and hydro resources and the lead time required for oil shale development, a successful petroleum investment program would provide the best prospect in the near term for augmenting indigenous supplies. One potentially significant step in this  -2- direction, undertaken under the current Bank loan for petroleum exploration (Loan S-18-MOR), has already been achieved through the discovery of gas and liquid condensates in Meskala in the Essaouira Basin. The Government is now aware that its present plans in the energy sector would need to be significantly altered if the discovery proves to be economically exploitable. The assessment of Meskala's hydrocarbon potential is therefore a priority objective of its energy investment program, and is the single most promising option for alleviating Morocco's dependence on imported energy in the 1980's. Energy Resources 1.05 Coal. At present, Morocco's main domestic commercial energy sources are coal and hydropower. Its coal potential appears, however, limited to the Jerada anthracite deposit which is presently being exploited. The Jerada basin is estimated to contain between 8-40 million TOE of coal reserves. No other mineable coal deposits have been identified, although traces of coal have been found in four different basins (Tindouf, the Hauts Plateaux, Er Rachidia, and Fquih Ben Sahal). The Jerada mine entered production in 1938 and currently produces about 800,000 Tpy (or 350,000 TOE/yr). The mine is, however, difficult to exploit because of its highly fragmented geological structure and very thin, steeply inclined and deep seams. Given this geology of the coal deposits, production from the Jerada area is unlikely to exceed 0.6-1.2 million TOE per year. 1.06 Hydropower and Electricity. Morocco's total hydro potential is estimated at about 4,600 GWh (1.1 million TOE) per year. About a third of the total hydro capacity is already developed, and current plans call for developing 85% of total potential by the early 1990s. Rainfall is both highly seasonal and variable from year to year. Many small hydro sites exist, but even cumulatively they are only a minor resource. 1.07 The major elements-of the power system include oil-fired power plants at Mohammedia, Kenitra, and Casablanca, a mine-mouth coal-fired plant at Jerada, a number of hydro plants, and a transmission grid linking all the major generating and consuming centers from Agadir to Tangier and Oujda. In 1981, installed capacity totalled about 1,840 MW of which 66% was thermal and 34% hydro. The capacities and 1981 operation of the principal power stations are shown in Annex 1.1. 1.08 Hydrocarbons. Prior to 1958, exploration for hydrocarbons was confined principally to the shallow depth horizons of the Gharb basin in northwest Morocco and resulted in discovery of several small oil fields. Sidi Rhalem, another small oil field, was discovered in the Essaouira Basin in southwest Morocco in 1961. Whereas in the past, oil production from these fields made small but significant contributions to energy supplies, the Gharb fields are almost depleted now and domestic oil production is continuing to decline. Annual production, which peaked at about 2,900 BD in 1963, has declined to about 350 BD (19,000 TOE/yr) by 1981. Exploration activity in the Gharb and Essaouira basins also led, prior to the 1980's, to the discovery of several small gas fields (paras. 2.08 and 2.10). An average of 3 BCF (60,000 TOE) per year of gas has been produced from 1975 through 1981, with production almost equally divided between the Gharb and Essaouira Basins.  - 3 - 1.09 In 1981, gas was discovered in deeper pre-Jurassic horizons at Meskala in the Essaouira Basin. The gas is of good quality and is rich in liquid condensates. The current and proposed exploration projects aim at assessing the recoverable reserves and production potential of this discovery and adjacent areas. 1.10 Oil Shale. Moroccan oil shale reserves identified to date are estimated at well above 100 billion tons, containing more than 6 billion tons of oil. The two major deposits are located at Timahdit in the central plateau about 90 kms south of Fes, and at Sebkat-Tazgha near Tarfaya. A third deposit is near Tangier and the Strait of Gibraltar. The most favorable deposit for early development of an oil shale industry appears to be Timahdit, where proven reserves of about 3.3 billion tons of oil shale have been identified with an average oil content of 65 liters/ton of shale. An extensive program to assess the technical and economic viability of a commercial exploitation of the Timahdit deposit for producing oil is presently being undertaken with the assistance of. the Bank (Loan 2114-MOR), as well as of foreign petroleum companies who might be interested in participating in an oil shale project in that location. 1.11 Nuclear Fuel. Morocco's large phosphate reserves (about 50 billion tons) contain some 7 to 10 million tons or 60 to 84 billion TOE of uranium. Extraction does not, however, appear economic with present technology. The Government is exploring the possibilities of using the extract for fueling nuclear plants to be operational in the 1990's. No conventional deposits of uranium are known. 1.12 Biomass. Moroccan natural forests cover about 5.1 million ha and an additional 2.6 million ha are covered by esparto grass; of this area, only about 2.5 million ha of forests and 1.0 million ha of esparto grass areas have significant production potential. The maximum sustainable rate of fuelwood extraction has been estimated at about 750,000 TOE per year, or less than 30% of the estimated actual rat-e. Agricultural residues appear to be a much larger (but also much less easily collected and used) resource. A very rough estimate puts potential production at, at least, 3.0 (and possibly as much as 9.0) million TOE/yr. It is also estimated that organic solid wastes and sewerage wastes can together provide about 360,000 TOE/yr. 1.13 Wind and Solar. Morocco is endowed with an unusually good wind regime technically well suited for both pumping water and generating electricity. The country is also favorably situated for the development of solar energy, with high average solar radiation of about 0.16 TOE/m2-year in the north and about 0.18 TOE/m2-year in the south. Both solar and wind resources are consequently promising sources of energy for small scale uses, but neither is likely to-contribute significantly to national energy balances. Energy Consumption 1.14 International Comparisons. Overall, the energy intensity of Morocco's economy is lower than those of most developing countries with similar economic structures. Commercial energy consumption in 1980 of 238 TOE per million US$ of GNP compares with 334 for Tunisia, 376 for Turkey, and 447 for Bolivia. Consumption of about 0.28 TOE/capita is in the lower end of the range spanned by these countries, of 0.78 (for Bolivia) and 0.25 (for Tunisia).  - 4 - 1.15 Current Consumption. A summary of energy consumption by sector and energy form is shown in the table below: Final Demand for Commercial Energy, 1981 (Thousand TOE) Natural Oil Products Total Sector Coal Gas Electricity CLF FO Total Commercial Industry 49 40 679 144 866 1,010 1,778 Transportation & Services - - 171 1,425 35 1,460 1,631 Agriculture - - 61 134 9 143 204 Households 4 260 349 17 366 630 Total 53 40 1,171 2,052 927 2,979 4,243 Note: "Industry" includes mining and "Services" include government and commerce. CLF (clean liquid fuels) include LPG, gasoline, kerosene, jet fuel, and gasoil). FO is fuel oil. 1.16 In 1981, industry accounted for about 42% of final demand for commercial energy. Of total industrial consumption of nearly 1.8 million TOE, about 21% was attributable to the phosphate and 24% to the cement industries. The transportation and services sector accounted for an almost equal share (or 39%) of commercial energy demand. Overall, households are the most important energy consuming sector; household consumption is, however, primarily reliant on traditional energy sources and constitutes no more than 15% of commercial energy demand. 1.17 Electricity and gas oil together account for over half of final demand for commercial energy, with 28% and 26% of the total respectively. The remainder is made up of fuel oil (about 22%), gasoline (8.5%), followed by LPG (7%), jet fuel (5%), coal (1.3%), kerosene (1.2%) and natural gas (1.0%). Morocco is unusual among developing countries in that the imbalance between the product slate of its refineries and the proportions in which oil products are consumed gives it a surplus of the higher value light products and/or a deficit on the lower value heavy products. Oil product exports are thus primarily naphtha, while product imports are mostly fuel oil. Substantial quantities of LPG are also imported. 1.18 Past and Future Trends. Over the 1965 to 1980 period, Morocco's commercial energy demand grew at about 7.4% p.a. on average. This compares with an average annual GDP growth rate of about 5%. The overall growth rate actually slowed somewhat through the period, so that by 1975-80 energy demand growth (of 6.5% p.a. on average) was within 1% p.a. of the (5.6% average annual) GDP-growth rate. There was also some shifting of market shares among the three broad groups of commercial energy commodities; electricity; clean liquid fuels (CLF) and boiler fuels, 1/ as indicated in the table below. 1/ Boiler fuels include coal, natural gas and fuel oil - for CLF see footnote in table above.  1.19 Overall, demand for commercial energy is expected to grow from 4.7 million TOE in 1980 to between 8.6 million TOE and 13.1 million TOE in 1995 1/ 1J. As also indicated in the table, projections for the period 1980- 1995 imply a continued shift toward electricity from 26% of total consumption in 1980, to 40% in 1995. Evolution of Commercial Energy Demand, 1965-1995 (million TOE and %) Actual Low Forecast High Forecast 1965 1980 1995 1995 Electricity 0.3 (20) 1.1 (26) 3.1 (40) 4.7 (40) Clean Liquid Fuels 0.7 (47) 2.0 (48) 2.8 (37) 4.3 (37) Boiler Fuels 0.5 (33) 1.1 (26) 1.8 (23) 2.7 (23) Final Demand 1.5 4.2 7.7 11.7 Losses 0.1 0.5 0.9 1.4 Total 1.6 4.7 8.6 13.1 Energy Supply 1.20 Past Pattern and Potential Future Options. The growth in energy consumption over the 1965-80 period was coupled to a pattern of energy supplies characterized chiefly by three main trends: (i) a declining share of hydropower (from 87% of total electricity supply in 1965 to 29% in 1980); (ii) a parallel decline in the share of coal (from about 28% of total boiler fuel supply in 1965 to 17% in 1980); and (iii) a marked shift in favor of oil products, the share of which in total commercial demand rose from about 71% in 1965 to about 85% in 1980, with the major proportion of this increase being accounted for by an increase in supply of fuel oil. In 1970, total demand for fuel oil (direct plus indirect via thermal power plants) represented 33% of the oil market, a fraction which rose to 45% in 1980. Meanwhile, the share of fuel oil in refinery production (excluding non-energy products) rose from 30% in 1970 to 44% in 1980. 1.21 If the present dependence on oil continues, crude oil imports could rise from 4.4 million TOE in 1980 to as much as 11.3 million TOE in 1995, entailing an increase in the oil import bill from about $0.9 billion in 1980 to nearly $3.5 billion in 1995 (in 1981$) (see Annex 1.2). On the demand side, the large proportion of Morocco's energy consumption that is now accounted for by fuel oil directly or indirectly offers a variety of opportunities for inter-fuel substitution and conservation; and on the supply 1/ Real GDP growth is projected at 3.1% p.a. on average in the 1980-85 period and 5.0% p.a. thereafter. Overall demand for commercial energy is projected to grow at the same rate (low forecast) or at 3% p.a. higher (high forecast). 2/ Consumption of traditional fuels is projected to decline very slowly (from 2.59 million TOE in 1985 to 2.46 million TOE in 1995) as consumers switch to commercial fuels (primarily LPG) at a rate that compensates for population growth.  - 6 - side, imported coal, natural gas and condensates from the Essaouira area, and oil shale could be available to displace imported oil on a large scale. 1.22 Imported Coal. New thermal power stations and the cement and phosphate industries would represent the most likely major markets for coal. Together they are projected to provide (in the case of high demand and no gas supplies) a potential coal market of about 1.6 million TOE in 1990 and 4.0 million TOE in 1995. At this level of demand, switching to coal could hold the oil import bill to less than 1981$1.8 billion in 1990. Holding demand growth at the same time to lower levels would reduce the import bill for that year to 1981$1.4 billion (Annex 1.2). 1.23 Natural Gas. Natural gas and condensates from Essaouira represent the most immediately promising source for alleviating the need for imports of either oil or coal. At present, 37% of the small quantities of natural gas produced annually (para. 1.08) is consumed in refining, 47% in the phosphate, and 16% in the pulp and paper industries. However, 'new' natural gas, if it were to be available in sufficient quantities, could supply nearly 60% of the total direct demand for boiler fuels and between 47% and 75% of demand in electricity generation. Depending on the growth rate of overall commercial energy demand, the projected market for gas would total between 1.9 and 2.9 million TOE in 1990 and between 3.0 and 5.4 million TOE in 1995 (see also Annex 1.3). A preliminary market study is on-going under the current petroleum exploration project to further assess this gas market and rank possible uses for both the gas and condensates. It is presently estimated that if by 1990 gas from Essaouira were available in sufficient quantities to meet market demand, the import bill would be held to about 1981$1.2 billion. Holding demand growth to lower levels would reduce the bill for that year to 1981$0.9 billion (Annex 1.2). 1.24 Oil Shale. Large scale natural gas and condensate production from Meskala could displace fuel oil in the market for boiler fuels and provide a source of naphtha for gasoline production other than the distillation of crude oil as well as substantial quantities of LPG. The middle distillates, primarily gas oil in the Moroccan context, would however be relatively unaffected. Shale oil development, on the other hand, would probably have the opposite effect as shale oil typically yields a high percentage of middle distillates. 1.25 The shale development, whose feasibility is being studied, would produce 0.6-1.2 million TOE per year in both oil extracted from shale and the oil equivalent of electricity generated from direct shale combustion.l/ On the basis of current estimates, the first commercial plants would not appear to be economically justifiable 2/. This picture of the economics could, however, be altered should it turn out that the costs and risks involved can 1/ Estimated shale reserves at Timahdit are sufficient to support an even larger complex producing roughly 3.6 million TOE/year over at least a 25-year period. 2/ Shale oil extraction cost of about $350/TOE, as compared to the projected price of imported crude oil of $305/TOE in 1995; and electricity costs also of about $350/TOE compared to about $220/TOE for a coal-fired plant.  - 7 - be significantly reduced and/or that the oil import price will rise faster than is presently projected. l/ For this reason, the option of medium-term oil shale supply should not be prematurely discounted. On the other hand, neither should a commitment to shale development be made prior to complete evaluation of the results of the planned feasibility studies. Energy Conservation and Pricing 1.26 Possible Investments. Substantial energy and energy cost savings appear feasible in Moroccan industry through energy conservation and fuel switching. A preliminary survey of all possible conservation measures has indicated that, taken together, enterprises in the major industries involved (cement, textiles, pulp and paper, and sugar) could save nearly 82,000 TOE annually, or about 5% of the industrial sector's total energy consumption in 1981. These annual savings would be equivalent to about $15.5 million for a total investment cost of about $40.0 million.2/ Fuel switching of several (and possibly all) cement plants to coal or gas, should it become available, is expected also to be highly economic. A program of energy audits and feasibility studies to identify and evaluate the potential in sufficient detail to permit investment decisions to be made is presently under consideration. 1.27 Pricing. The Government has for several years now been encouraging energy conservation by maintaining prices of most resources above their opportunity cost to the economy. Annex 1.4 summarizes the commercial energy price structure and the relationship between internal prices and comparators constructed by adding an allowance for internal transportation and distribution costs to the c.i.f. price of imports. Oil product prices are all at or above their comparators, with the lower margins applying (for income distribution purposes) to the household fuels, LPG and kerosene, and the highest to gasoline. Although imported steam coal is also above its comparator, the domestic coal price and the average price of electricity remain at 76% and 69% of their comparator prices respectively. Electricity tariffs need to be generally increased and their structure rationalized, both to facilitate the financing of power investments, and to stimulate more efficient use of electrical energy. This is presently being discussed between the Bank and the Government within the context of the preparation of the proposed Dchar el Oued project. Coal pricing will also be addressed through a future project currently under preparation. The Bank has also recommended to the Government through the recent UNDP/World Bank Energy Assessment (Report No. 4157-MOR) other structural price incentives to improve productivity and efficiency in petroleum refining and product distribution and coal importation. 1.28 At present, the very small quantities of natural gas produced from Essaouira are sold at about $2.5/MCF or below the cost of the fuel replaced (about $4.0/MCF). This price, however, is covered by long-term contracts. The Government has been reviewing the gas pricing issue, with the intention of setting an appropriate price for all 'new' domestic gas supplies. The 1/ A real price increase for oil averaging 2.1% p.a. between 1980 and 1985. 2/ In 1981US$.  - 8 - uncertainty as to the volume of future supplies from Meskala complicates the determination of such a policy, as the utilization options and related opportunity costs for gas are partly a function of the volume of supply. Nevertheless, the Moroccan fuel oil market is large, and much of it could be switched to gas. For the time being, a gas price linked to that of fuel oil (with enough of a discount to justify conversion and rapid market penetration) would therefore be appropriate until reserves are found to be sufficiently large that it appears advantageous to encourage lower value uses. Following consultations during the course of preparation of this project, the Government has confirmed to the Bank its intention to set the price for all new gas on the basis of the cost of alternative energy sources. Sector Institutions 1.29 Present Organization. The Ministry of Energy and Mines (MEM) is responsible for overall planning and policy making in the sector. It also supervises several public (or semi-public) enterprises which manage the sector's key activities; most notably, the Office National de Recherches et Exploitation Petrolieres (ONAREP) in hydrocarbon and shale exploration and production; the Societe Anonyme Marocaine de l'Industrie du Raffinage (SAMIR) and the 50% ONAREP-owned Societe Cherifienne des Petroles (SCP) in refining; the Societe National des Produits Petrolier (SNPP) in the distribution of petroleum products; and the Charbonnages du Maroc (Charbonnages), operator of the Jerada coal mine. It also has administrative control over the Office National de l'Electricite (ONE), the public enterprise responsible for most of the electricity generated and transmitted in Morocco. MEM is also involved in development of renewable energy and has established the Center for Renewable Energy Development (CDER). 1.30 The Ministry was created at the end of 1977 and has two main operating directorates--Energy and Mines; the Energy Directorate is organized into three divisions responsible for dealing with energy supply issues and institutions: (i) petroleum products (SAMIR, the SCP refinery, SNPP, distributors); (ii) electricity (ONE); and (iii) energy resource development (ONAREP, Charbonnages, and CDER). 1.31 Exploration and production of oil and gas form the major part of the operations of ONAREP whose responsibilities include not only (i) the exploration for oil and gas either on its own or through joint ventures with foreign companies, and (ii) the production of fields discovered on its permits, but also (iii) the prospection and development of oil shale resources; and (iv) the management of the government portfolio in the SCP refinery. Of the two refineries in Morocco, one, at the port of Mohammedia (SAMIR), is 100%-owned by the Government with a refining capacity of 2.2 million tons per annum which is now being increased to 5.7 million tons, and the other (SCP) is located inland at Sidi Kacem with a 0.8 million ton capacity. Petroleum product distribution is handled by 27 companies, most of them owned 51% by SNPP, a state enterprise, and 49% by foreign companies. The remaining distributors are owned by private Moroccan interests. Separate public enterprises operate an underground LPG storage facility, ocean shipping of oil and oil products (three enterprises), and petroleum product storage terminals.  - 9 - 1.32 In the coal subsector, the Charbonnages is the single coal producing institution and is also directly in charge of coal exploration and export marketing. In the power subsector, ONE generates approximately 90% of the electric power in the country, transmits it to the load centers, and distributes about 40% of its production outside the large cities. Distribution of power in large urban areas is the responsibility of Regies which are autonomous public enterprises under the supervision of the Ministry of the Interior (MI). At present, the renewable energy unit at MEM is the main policy formulations body in this subsector. Two other ministries, the Ministry of Agriculture and Agrarian Reform (MARA) and MI also play a key role in the subsector through the Directorate of Water, Forests, and Soil Conservation (DEFS) and the Provincial Governors. Forestry Councils have also been established since 1976 at national, provincial and local levels. Sector Investment, Policy and Planning 1.33 The current 1981-85 five year plan calls for a total of energy related investments of about DH11.65 billion, or about 10% of total public investments foreseen under the plan. Distribution among subsectors is as shown in the table below. Of the total, about DH2.00 billion or 17% is for oil and gas exploration and production. Government budget contributions of about DH6.54 billion (56% of the total) are expected to finance part or all of the investment in most categories and none in others (oil refining and product distribution). Other sources of investment financing in the sector would include private investors (mostly foreign oil companies), cash generation from the enterprises, and grants or loans. Energy-Related Investments - 1981-85 Plan (DH billion) Total Govt. Budget Investment Contribution Electricity 4.39 2.14 Oil and Gas Exploration and production 2.00 1.50 Other 2.27 0.57 4.27 2.07 Oil Shale 2.17 1.69 Coal 0.25 0.11 Renewables 0.54 0.51 Other 0.02 0.02 11.65 6.54 Note: The Meskala discovery was not foreseen in the preparation of the plan and no specific allowance was included for a possible large-scale development. However, provision was included for possible development of small fields in Essaouira and the Gharb and for continuation and expansion of the exploration program in central Essaouira (the Meskala area) through end 1985. Other investments in oil and gas include oil port and tankers, LPG storage, refining and product distribution. Of the electricity investment, 40% is allocated to hydro generation, 22% for thermal generation and the  - 10 - rest for transmission, distribution and other purposes; of the oil shale allocation, about 51% is for a test station for liquids extraction, 45% for a direct shale combustion experimental unit and 5% for studies. The modernization of Jerada accounts for 100% of projected coal investment, and reforestation for about 83% of investment in renewables. 1.34 Over the coming 5-10 year horizon, the government has three main policy objectives for the energy sector: (i) promotion of energy import substitution; (ii) promotion of efficient energy use; and (iii) the increasing of domestic resource mobilization and budgetary savings through reduction in subsidies. To this end, in conjunction with an ambititous plan for investment, the Government is seeking to institute improvements on a number of institutional and policy fronts of which the most important involve (i) reinforcement of the process of selection and coordination of energy and energy-related investments and of the management and organization of public sector enterprises; and (ii) improvements in the present pricing structures and in the incentives for attracting further foreign investment. The proposed loan would address several of these issues, particularly those impacting the petroleum subsector, and as such forms part of an overall program for Bank assistance to Morocco in this critical sector. II. THE PETROLEUM EXPLORATION SECTOR Introduction 2.01 Exploration for oil and gas has been conducted in Morocco since 1928. The only active company prior to independence in 1956 was the French company, Societe Cherifienne des Petroles (SCP). Following independence, a petroleum code was enacted which provided for both State agency and foreign oil company participation in exploration and subsequent development activities. Although the provisions of this code are quite attractive relative to current industry standards, the level of foreign investment varied widely over the past two decades. The Government reacted both by increasing the exploration program of its own State agency and by making special efforts at attracting further foreign oil company interest through formal presentations and discussions with foreign oil firms. Past efforts are now being renewed with the launching of a new promotional program undertaken by ONAREP with the assistance of industry consultants financed under the current Bank exploration loan. 2.02 The discovery of Meskala by the national oil company has coincided with renewed interest in exploration by foreign companies, principally directed towards Morocco's offshore. At the same time, in view of its importance to Morocco, the rapid assessment of Meskala has become the principal focus of ONAREP's own investment plans for the coming two years. Petroleum Geology and Prospectiveness 2.03 Onshore and offshore Morocco span about a dozen sedimentary basins which could contain oil and gas. These cover an area of about 150,000 km2, about two thirds onshore. Commercially producible discoveries have been found in two onshore basins, the Gharb and Essaouira, and good shows have been  - 11 - encountered in two others, Tarfaya (offshore) and Doukkala (onshore). Potential source rocks, which may have generated oil or natural gas, cover a large part of the sedimentary basins and include Miocene shales, Jurassic limestones and shales, and Paleozoic shales. Structures capable of trapping the generated hydrocarbons are also numerous and involve: compressional folds; plastic flow of widespread Triassic salt deposits; and pre-Triassic block faulting. Seals needed for the retention of hydrocarbons in traps are also widespread and include compact shales, dense limestones and evaporites (including, in particular, Triassic salt). The one criteria for successful exploration not yet found to be widespread is the presence of high quality porous reservoir rocks. Success in future exploration hinges, therefore, on identifying and drilling those structures where improved reservoirs may be reasonably predicted, and/or on extending the search in areas already containing oil and gas discoveries in the direction of predicted reservoir improvement. 2.04 Proved plus probable remaining reserves are quite small, of the order of approximately 65 BCF of natural gas (40 BCF developed in four fields and 25 BCF undeveloped in six fields), 1 MM Bbl of gas liquids (all undeveloped) and 1 MM Bbl of oil (developed in two fields). Current production is about 350 BD oil and 8.2 MMCFD gas. 2.05 Although not yet assessed, the recent Meskala gas/condensate discovery from presalt Triassic sandstone in the Essaouira Basin offers the prospect for additions to the proved plus probable reserves, on a scale quite large in comparison to previous discoveries in Morocco. Based on current information, the best prospects for additional discoveries of gas are in the Essaouira, the Gharb, Boudnib, and the Hauts Plateaux Basins onshore and in the offshore Mediterranean. The best prospects for new discoveries of oil are in the offshore Tarfaya, Agadir and Essaouira Basins, and the onshore Doukkala Basin. The geology of Morocco is described in further detail in Annex 2.1. (See. also IBRD Map 16879R1). Petroleum Legislation and Policy 2.06 Under the 1958 Petroleum Code, private investors are encouraged to explore in Morocco. Exclusive exploration rights on parcels selected by the oil company (size negotiable) are granted for three successive four-year periods based on submission of a satisfactory work program for each period. In the case of a commercial discovery, a 30-50 year development license is awarded. Preference is given to those investors who offer the State agency participation in the exploration/development venture. Under such joint- venture agreements, foreign partners are liable for all exploration expenditures, their proportionate shares of development and production costs, royalties (12.5% for oil and 5% for gas), and taxes on net income of 55%. Costs, including related exploration expenses, are expensed or amortized at rates varying from between 10% and 20% per annum. Investors are accorded an additional incentive in the form of a 27.5% depletion allowance. These terms are quite attractive relative to current industry standards. A revision of the 1958 Petroleum Code is now under consideration. The new code, which is expected to be in force by mid-1983, will continue to emphasize investment incentives.  - 12 - 2.07 Only one group, led by Petrofina (Apex), has applied for and received a development license in a joint-venture with ONAREP for two small gas fields in the Gharb Basin. ONAREP and SCP 1/ have also been awarded development contracts for three fields, two gas and one oil, in the Essaouira Basin. The remaining discoveries which may be developed are in areas controlled by ONAREP and plans for their development are currently under study (para. 2.14). Past Exploration Activity 2.08 Prior to Independence in 1956, all exploration was conducted by SCP. Most of the exploration during this period took place in the Gharb Basin where a substantial number of wells were drilled and several small oil fields were discovered at shallow depths. All fields discovered during this period are now essentially depleted. After Independence, under the then new Petroleum Code, exploration extended to other areas, first onshore and then offshore, mostly through joint-venture agreements between ONAREP's predecessor agency, the Bureau de Recherches et de Participations Minieres (BRPM) and foreign investors (para. 5.01). The first onshore exploration permit was awarded in 1958 in joint-venture with Agip in the Tarfaya region. The first offshore permit was awarded in joint-venture with Esso in 1967 in the offshore Tarfaya Basin. A number of other permits, both onshore and offshore, followed. Between 1958 and 1972, over 80 exploration wells were drilled onshore and ten were drilled offshore. The onshore wells averaged 1,750 m in depth and the offshore wells averaged about 3,300 m. During this same period, the exploration activities of the Moroccan state agency remained modest, principally involving joint-venture work with Apex and SCP in the exploration of the Gharb and Essaouira Basins respectively. The fields currently producing in these two areas were discovered during this time. 2.09 The early 1970s (immediately post-1972) were a turning point in the history of exploration in Morocco as the foreign companies active offshore began to pull out due to disappointing results. The biggest setback came when Esso relinquished its large offshore Tarfaya permit even though it had discovered a sizeable in-place reserve and had tested oil at the rate of 2,700 BD in its MO-2 well. However, the oil was viscous (with a low API gravity) and in the absence of any appreciable matrix porosity Esso judged, probably correctly, that the reservoir was highly fractured and had a strong water drive. Therefore, severe water coning problems could have been anticipated resulting in a very low recovery of oil in-place, and the discovery was declared noncommercial and the permit relinquished. Poor reservoir quality, alluded to previously, was the principal reason for this action. 2.10 Between 1973 and 1978, as foreign investors continued to leave, the burden of exploration for petroleum in Morocco reverted to BRPM. BRPM was in a period of expanding its organization and building its capability by acquiring seismic and drilling equipment, and made during the period, two small discoveries in the onshore Essaouira Basin (Toukimt and N'Dark). Encouraged by this success, BRPM proposed, in 1978, an ambitious program designed to increase its exploration expenditures three-fold (from US$17 million per year to US$50 million per year). At the same time, a vigorous 1/ Which has, since Independence, been 50%-owned by Morocco.  - 13 - effort was made to re-attract foreign companies (of which two responded acquiring two onshore permit areas and one offshore). Just, however, as BRPM's expanded exploration program was getting underway, economic problems led the Government to curtail BRPM funds for petroleum exploration, reducing allocations to about US$15 million per year. At this point, BRPM had a number of prospects ready to drill similar to those on which the earlier discoveries had been made in the Essaouira Basin plus several deep gas prospects (in the Meskala area) in the same basin which had been indicated through prior drilling but which had not yet been fully evaluated. It was also learned at about this time that shallow gas reservoirs in the Gharb Basin could be identified on the seismic records by analysis of amplitude anomalies ("bright spots") as a result of work done by foreign companies still active in the area (for further details on exploration history see Annex 2.1). 2.11 In order to follow-up on these prospects and to prevent the loss of the exploration momentum that had begun, BRPM approached the Bank for a petroleum exploration loan. A Bank loan of US$50 million was approved on May 19, 1980 (Loan S-18-MOR). The principal provisions of this loan were allocated to the drilling of exploratory wells, and the carrying out of seismic surveys and geologic studies aimed at elaborating a strategy for future onshore exploration and attracting foreign investors. Since the loan was made the Bank has financed ONAREP's drilling of eight exploratory wells and two appraisal wells, seven in the Essaouira Basin and three in the Gharb Basin. Three discoveries were made, two in the Gharb and one in Essaouira. Of these, the Meskala-101 Triassic discovery in Essaouira is the only one likely to be commercial. The discovery established a new productive zone for Morocco in a good location and, as detailed in Annex 2.1, the gas is of good quality and rich in liquid condensates, and the possibility exists that the gas accumulation may extend over a large regional area. In view of the jointly assessed promise of the discovery, the Bank and ONAREP reached agreement immediately following the testing of the discovery well to allocate all remaining drilling funds under Loan S-18-MOR to the drilling of four additional wells, all deep gas tests in Essaouira (three to appraise the discovery and one to explore adjacent areas). In addition, a reservoir engineering study by CORE Laboratories Inc. (USA), which has just commenced under Loan S-18-MOR, will initiate assessment of the Meskala reserves and production potential. The proposed project would have, as one of its principal objectives to complete the exploration and appraisal of this area (para. 3.12). 2.12 The gas/condensate discovery in Meskala in 1981 has coincided with a renewal of interest of foreign companies in Morocco's prospects. The interest, however, is so far mainly directed towards the offshore. ONAREP has signed three new exploration joint-venture agreements with foreign partners since the fall of 1981. These agreements with Arco (September 1981), Mobil (February 1982) and Amoco (June 1982), cover a 4,450 km2 offshore Agadir block, two blocks of 9,710 km2 offshore Tarfaya and two blocks of 9,835 km2 offshore the Mediterranean, respectively (see Map IBRD 16879R1). They commit the foreign partners (who will bear 100% of exploration cost) to exploration expenditures in the first four-year period, of $18.0 million (seismic plus two wells) in the case of Arco, $37.5 million (seismic plus 3 wells) in the case of Mobil, and $22.0 million (seismic plus 2 wells) in the case of Amoco. Negotiations are also underway with the Kuwait Foreign Petroleum Corporation (KFPC), which appears to be the only company giving serious consideration at  - 14 - this time to several onshore blocks (Boudnib, Doukkala and the Essaouira extensions). The two foreign companies (Elf and Phillips) who signed contracts in 1978 (para. 2.10) have since relinquished their permits. However, work on small fields in the Gharb by Apex, and in Essaouira by SCP, continues. During 1981, nine foreign companies, in addition to those negotiating contracts visited ONAREP inquiring about potential exploration licenses and this pace of inquiries is currently being maintained. With a view to reinforcement of these discussions, ONAREP has recently signed a contract (funded under the current Bank loan) with Gaffney Cline and Associates Ltd (UK) for a first phase promotional program including collation, interpretation and presentation in about mid-1983 of five priority areas to the industry both in Morocco and abroad (Ifni Offshore, Essaouira Offshore, Souss Onshore, the Hauts Plateaux and Tadla, see IBRD Map 16879R1). A second phase promotional program would be undertaken under the proposed loan (para. 3.12-3.13). 2.13 While ONAREP did not formally advertise the Meskala area to the oil industry, the area has been shown to all the companies that have visited enquiring about possibilities to invest in Morocco. Only one company, KFPC, made a proposal; but they were only willing to commit to a small and extended program (approximately two wells over a two-year period). Other companies that may have considered participation would most likely have taken a similar position since the area is gas prone and any future gas production is likely to be directed, at least initially, to the domestic market. Without a clear prospect of an export potential, the discovery is unlikely to generate much foreign interest, particularly at a time when the international oil industry is curtailing its commitments to new exploration activity. On the other hand, foreign companies may become interested if further drilling establishes both commercial production and indicates substantial potential for a large development, including export capability; and both ONAREP and the Government will be better placed following the assessment of the discovery, to decide on the utility of foreign participation. For the present, therefore, to expedite assessment of Meskala and to appraise the overall potential of the area, ONAREP will need to provide the investment in the project area on its own. In parallel with this effort, exploratory commitments by foreign operators will also be increasing (as indicated in the table below), and may be further enhanced by a successful promotion program financed under the current loan. This should effectively reduce the requirements on ONAREP for exploration elsewhere in Morocco, and permit it to concentrate its investment program on the rapid appraisal of Meskala.  - 15 - Onshore and Offshore Exploration Investment, 1973-84 (in US$ million) Year ONAREP Foreign Total 1973 10 30 40 1974 10 20 30 1975 13 15 28 1976 14 5 19 1977 16 5 21 1978 15 10 25 1979 15 10 25 1980 20a/ 14 34 1981 25a/ 18 43 1982 projected 40a/ 20 60 1983 projected 40a/ 48 88 1984 projected 45a/ 50 95 a/ Includes actual and proposed World Bank financing of US$120 million Current Petroleum Exploration Investment Strategy 2.14 ONAREP plans encompass all possible options currently available to Morocco in its efforts to accelerate exploration and development of petroleum resources. These are: (a) to reinforce the continuing open-door policy with respect to foreign companies through activities aimed directly at exploration promotion; (b) to develop past discoveries (the Toukimt gas/condensate field in the Essaouira Basin and possibly the OKT gas field in the Gharb Basin); (c) to expedite full evaluation through seismic and drilling of the reserve and producing potential of the recent Meskala discovery; (d) to conduct predrilling exploration (geologic studies and geophysics) in most prospective remaining basins in order to promote foreign industry investment, or in the absence of interest, selectively drill on its own; and (e) in conjunction with SCP and Apex to study currently producing fields to determine what, if any, additional production capability may be added by either drilling new wells or by remedial work on existing wells. While all of these options are being pursued, the major focus at present is on the Meskala appraisal drilling. The proposed Bank loan will provide ONAREP with substantial assistance both its efforts at Meskala and for its programs for promotion of Morocco's onshore and offshore. The Role of the Bank in the Petroleum Subsector 2.15 The proposed loan would be the second loan made to Morocco for petroleum exploration, and would constitute part of a coordinated Bank effort to assist the country in the energy sector. The Bank has already made several power loans to Morocco aimed at the development of the country's hydroelectric potential and rural electrification, and a new loan for this purpose is presently under consideration. A loan to support assessment of the technical and economic viability of alternative options for oil shale development was made in 1982. A UNDP/Bank Morocco energy sector assessment and a Bank power sector study have also recently been completed.  - 16 - 2.16 In the absence of viable alternatives for substantially increasing domestic energy supply before the 1990's, the acceleration of petroleum exploration and development remains a high Government priority. In light of this, the Bank's lending strategy in the petroleum sector is aimed principally at assisting Morocco to pursue the two principal strategic options available to it in expediting exploration and development of domestic oil and gas: (i) the rapid assessment of discovered resources by following up on the encouraging results achieved at Meskala under the current exploration project; and (ii) the active encouragement of new investment in exploration by foreign parties. 2.17 The proposed project constitutes a major proportion of total public investment in exploration and production for the coming two years. By its presence, the Bank aims also at helping ONAREP undertake a more efficient exploration program by improving project design and ensuring adequate implementation arrangements. The Bank has already played a key role, during preparation of the project, in helping ONAREP to define a least cost strategy for appraisal of Meskala and exploration of adjacent Essaouira areas, and to assess the external technical assistance requirements for sound management and supervision of drilling operations in difficult high pressure gas formations. As was the case for the first exploration project (Loan S-18-MOR), the proposed loan would be a vehicle for the transfer through technical assistance of the most up-to-date oil industry technology and management skills. It would also assist in the implementation of a medium- term plan for ONAREP aimed at strengthening its technical, managerial, and financial capabilities so as to enable the company to better fulfill its mandate in the petroleum sector. 2.18 A successful Essaouira exploration/appraisal program, supported under the first exploration project and the proposed loan, would provide the basis for major policy decisions on the development of the Meskala discovery and the elaboration of a strategy for optimization of future natural gas use. These would include: (i) formulation of a field development strategy; (ii) review the need for, and relative merits of, seeking technical and financial support from foreign contractors or foreign company participants; (iii) agreement on the end uses of gas and natural gas prices; and (iv) formulation of a strategy for dealing with the implications of a gas development on investment in oil refining and possible future energy-intensive chemical and mineral projects. The proposed loan includes several studies aimed directly at addressing these policy issues, and could be a prelude, in the event of success in the drilling program, to a continued Bank role in helping Morocco to implement the desired major changes in the pattern of its energy supplies. III. THE PROJECT Background 3.01 In May 1980 the Bank approved a loan (Loan S-18-MOR) of $50 million to the Bureau de Recherches et Participations Minieres (BRPM) for the purpose of: (a) continuing the petroleum exploration program in several geological basins, (b) rehabilitation and subsequent maintenance of BRPM's seismic and drilling equipment; and (c) technical assistance to BRPM for its petroleum and oil shale activities.  - 17 - 3.02 The principal result of the current project was the discovery of natural gas at Meskala in the Essaouira Basin. The discovery well, Meskala-101 (MKL-101), situated some 30 kilometers east of the city of Essaouira, was completed in December 1981. Its maximum open flow potential approximates 20 million cubic feet of gas per day. However, its most efficient rate (MER) is approximately 6 MMCFD of gas and 510 BD of condensates with a well head flowing pressure of some 4,800 psi. Another appraisal well Meskala-102 (MKL-102) was also drilled and tested at a significantly lower rate than the discovery well (1.4 MMCFD of gas and 100 BD condensate with a surface flowing pressure of 3,100 psi). Three additional wells are currently drilling, two of which are in close proximity to the Meskala discovery (MKL-103 and MKL-104) and the third an exploratory well (OTA-3) located 20 kilometers from MKL-101. (See IBRD Map 16880R). 3.03 The project is now in the last stage of execution and should be completed by end July 1983. Project activities will, by that time, have encompassed 13 wells (10 completed and 3 ongoing) and about 55 crew months of seismic effort covering about 5,000 kms of line (para. 2.11). The Borrower's drilling and seismic equipment has already been upgraded; and the loan continues to provide technical assistance to ONAREP through consultants' services for exploration and drilling, and for exploration promotion, reservoir engineering, market and institutional studies (paras. 1.23, 2.11, 2.12 and 5.19). The initial oil shale prefeasibility studies have been completed, and the oil shale studies are continuing with Bank support under Loan 2114-MOR. 3.04 Past progress in the execution of the current project was adversely affected by three principal factors: (a) difficult drilling conditions in the Essaouira Basin and delays by BRPM in contracting technical assistance; (b) an inability to pre-finance through budgetary funds all purchases of materials and payments to contractors; and (c) the lengthy procedures entailed in concluding arrangements for the splitting of the mineral and petroleum assets of the BRPM and establishment of ONAREP. However, since ONAREP's institution in 1981, a major effort has been made by both ONAREP and the Government to resolve these difficulties. ONAREP has actively sought and obtained technical assistance under the current loan, and the scope of this assistance is being significantly increased in early 1983, in preparation for the expanded activities which will follow completion of this first project. At the same time, ONAREP's investments have been accorded priority by the Government, and disbursement procedures under the current loan have been changed to allow maximal use of loan funds for direct payments to suppliers and service contractors. Basic arrangements for the splitting of BRPM's assets have also more recently been concluded, and the transfer of the current loan to ONAREP has become effective on February 25, 1983. Disbursement of loan funds which had been slow through 1980 and 1981, proceeded at a satisfactory pace throughout-1982 with the changeover to direct payments procedures. Cumulative disbursement is expected to total $42.0 million by end-March 1983. The remaining loan funds of $8.0 million are fully allocated (principally to well and geophysical services, technical assistance and studies), and the loan is expected to be almost fully disbursed by end-September 1983. 3.05 While the Meskala gas discovery is potentially significant, it is extremely difficult, at this stage, to evaluate the size and extent of the resources associated with this discovery. To do this it is necessary to  - 18 - continue further geophysical surveys and drilling before a full evaluation of the discovery can be made. Given the potential importance of this discovery to Morocco, both the Government and the Bank agree that ONAREP should continue its operation in the Meskala area at least until the gas find is fully evaluated, following which other financing/joint venture options could be explored. In June 1982 a Bank pre-appraisal mission visited Morocco, during the course of which the scope and content of the proposed project were formulated. Project appraisal was completed in November 1982. Gas Potential in the Meskala Area 3.06 There are strong indications that the gas generating source rock extends over a large area in Essaouira; and thus, the presence and quality of gas bearing reservoirs are expected to be the key parameters governing the presence of commercially exploitable reserves at Meskala. The evidence of a large gas prone area is provided by three deep wells (MKL-1,TK-201 and OTA-2), drilled between 1975 and 1978 on the top and on the flank of a high regional fault block (the greater Meskala horst block). All the wells had gas shows but were prematurely abandoned or improperly tested due to mechanical difficulties or inability to control the high formation pressure. The linear distance between these wells is 25 kilometers. A re-interpretation of the electric logs of MKL-1 shows that this well should have been productive with an indicated pay zone thicker than penetrated in the discovery well MKL-101. Furthermore, it is believed that the underlying Paleozoic age rocks could contribute to gas reserves in the area if an adequate reservoir were to be encountered in these formations (which has not occurred so far). (See Annex 2.1 for a complete discussion). 3.07 While there is convincing evidence for the presence of gas in the Meskala area, there are a number of less encouraging features and uncertainties which will have a bearing on the overall size and commerciality of the discovery. The Meskala reservoir characteristics are poor and the geological and geophysical knowledge of the structural configuration and the extent of the gas accumulation is still quite limited at present. The gas is contained beneath a Triassic salt layer of about 300 feet thick (which hampers obtaining good quality geophysical reflections). The gas pay zone is a fine grained sandstone with low porosity (12% average) and very low permeability (from 2 to 4 millidarcies). Furthermore, the reservoir is believed to be compartmentalized by minor though sealing faults. Due to the poor and varying reservoir parameters (thickness, porosity, permeability, etc.) and the lack of definition of its limits, it is impossible to make an accurate estimate of commercial recoverable reserves with any confidence before drilling additional wells, continuing detailed geophysical surveys, and introducing modern processing and interpretation techniques. This is particularly true in regard to the lateral dimensions of the Meskala reservoir in an E-W direction since all the wells drilled or currently being drilled in the discovery area lie, with the exception of one well, on a north-south axis. Exploration Objectives and Project Design 3.08 In view of the fact that the Meskala discovery is not associated with the conventional structural traps, and due to the presence of Triassic gas in the nearby Toukimt field and OTA-2 well, the strategy for further exploration and appraisal of the Meskala area has been designed with a view to:  - 19 - (a) identifying trends in the reservoir where it is most productive; (b) testing and stimulating wells to ascertain their gas and liquid productive capacity; (c) exploring for the presence of gas reservoirs in the areas around the Meskala discovery (within the Meskala horst block) where gas shows/high pressure is known to exist; and (d) assessing the potential of the Paleozoic. 3.09 These objectives have been encompassed in a program proposed by ONAREP including the drilling of four exploratory wells and five appraisal wells, a high resolution seismic survey, and an airborne gravity magnetic survey. All the wells would be drilled with the Triassic (gas bearing horizon in MKL-101) as the primary objective and the Paleozoic as a secondary objective. A few of the wells will be deep wells with an objective to test the deeper Paleozoic (Ordovician to Carboniferous) horizons (see IBRD Map 17122 Annex 2.1, p.8). The wells would be drilled within an area in the Essaouira Basin of approximately 560 km2: the Essaouira Appraisal Area shown in IBRD Map 1688CR (see also Annex 3.1 for the proposed objectives and locations of wells). 3.10 Two appraisal wells (MKL-105 and MKL-106) would be drilled initially about two kilometers east and west of the discovery wells (more or less straddling the line connecting the wells MKL-1, MKL-101, MKL-103). At the same time, a high resolution and detailed seismic program will be conducted in the immediate area of the discovery. As some of the seismic lines would pass through the well locations, the outcome of drilling results and the high resolution survey will test the relationship between seismic reflections and reservoir rock development. If the results are encouraging, three more distant step-out wells from the discovery well (MKL-107, MKL-108, and MKL-113) would be drilled on the basis of the detailed seismic interpretation. The drilling of the four exploratory wells (GTO-101, ZEL-101, ABK-1, GTE-101) would proceed in parallel with appraisal of the local Meskala area. The airborne gravity and magnetic survey would also be conducted to help determine the limits of the Essaouira Basin, and provide an understanding of the structural framework of the Basin and of the configuration of the Meskala horst block and its relationship to the Basin as a whole. The synthesis of the drilling results and the geophysical surveys and the periodic re- interpretation of the data would provide a sound basis for estimating the production potential and recoverable reserves of the area around the Meskala discovery and the Meskala horst block. 3.11 If future appraisal wells prove as productive as the discovery well (MKL-101) there would be the possibility to initiate a development program before completing the drilling of all the wells. However, if the results are discouraging, provisions will be made to divert one or two of the more distant step-out wells and possibly one exploratory well to other areas, associated with the exploration promotion program, provided that no foreign company has elected to invest in that area and the area is judged as prospective. The proposed program should also be flexible enough to allow for shifting the emphasis from the immediate discovery area of MKL-101 to appraisal drilling in the event that one or more of the exploratory wells test significantly better than those in the MKL-101 area. The proposed program is conceived as a minimum exploration/appraisal program for what is indicated at present to be one of the most prospective areas in Morocco, particularly if it is viewed within the context of the Meskala geological setting, the discontinuity and  - 20 - weakness of the seismic reflections at or near the target horizons, and the relatively poor characteristics of the reservoir gas bearing sands detected to date. Project Objectives and Description 3.12 The proposed project would have as its principal objective the completion of the assessment of the Meskala gas discovery as well as the evaluation of the petroleum potential of the greater Meskala horst block initiated under loan S-18-MOR. It would also encompass in this regard (a) the provision of the requisite technical, managerial and financial reinforcement to ONAREP in order to execute this program and (b) preparative studies needed for a possible future full scale development program. As follow-up of similar activities financed under the current loan, the project would also aim at ensuring continuation of current efforts by ONAREP directed towards attracting additional foreign investment in exploration. The project would also aim at helping ONAREP and the Government implement a medium-term institutional plan for ONAREP which is currently being developed through a study financed under the current loan. 3.13 The project would comprise the following components: (a) De'lineation and appraisal of the Meskala discovery (i) Drilling two appraisal wells and three distant step-out wells within the Essaouira Appraisal Area (Annex 3.1); (ii) Conducting a high resolution geophysical seismic survey for about six crew months, around the Meskala discovery; and, (iii) Conducting reservoir engineering study of the Meskala area. (b) Exploration of the potential of the regional Meskala horst block (i) Drilling four exploratory wells within the Essaouira Appraisal Area (Annex 3.1); (ii) Expanding the coverage of the high resolution seismic surveys (referred to above (a-ii)) if results are encouraging; (iii) Conducting an airborne gravity and magnetic survey in the Essaouira Basin. (c) Exploration Promotion (i) Carrying out of up to 42 crew months of reconnaissance seismic surveys in the Essaouira Basin (outside the 560 km2 Essaouira Apprai.sal Area), in the Hauts Plateaux and in other onshore areas;  - 21 - (ii) Drilling of up to four exploratory wells, if the results under (a) and (b) above are discouraging, and if exploration drilling is warranted in new areas; (iii) Integration of geological studies, results of airborne gravity and magnetic surveys and reconnaissance seismic in specific data packages for areas and basins to be offered to foreign companies; and public presentations in selected locations of these areas to interested companies. (d) Technical support, studies and training (i) Provision of technical support for the operational management of the exploration, drilling and completion operations (to the extent of about 272 man-months), and provision of skilled drilling technicians (to the extent of about 150 man-months); (ii) Conducting studies (in addition to the reservoir and geological promotional work) for comprehensive gas utilization, and for detailed design of pipeline and surface facilities; and the undertaking of the second (or implementing) phase of an institutional study; (iii) Fellowship and in-country training of geologists, geophysicists and engineers in areas related to ONAREP activities. 3.14 Petroleum exploration programs, by their nature, are subject to modifications as new information becomes available. The proposed project is designed to be flexible and allow for changes within each component as dictated by results during the implementation period. The Bank has already reviewed and agreed, during appraisal, the locations for two appraisal wells (MKL-105 and MKL-106) and three exploratory wells (GTO-1, ABK-1 and ZEL-101), as well as the program for the airborne gravity magnetic survey, and the program for the seismic surveys through June 1983. Another major ONAREP/Bank review of the results of geophysical surveys and the drilling and testing operations is presently targeted for around mid-1983, or as soon as the preliminary interpretations of the initial 40 kilometers of high resolution seismic are available. As recommended in paras. 3.10 and 3.11, in order to optimize the drilling locations of the step-out wells, namely MKL-107, MKL-108, and MKL-113, the drilling of these wells should not commence prior to the interpretation of the high resolution seismic data and the integration of the results of previous drilling operations and geological and geophysical studies. Assurances have been obtained at negotiations from ONAREP to this effect. Agreement on the location of these three step-out wells, the last exploratory well (GTE-101), and the program for the still unallocated portion of the seismic surveys, is in any event expected either around mid-1983 or at subsequent ONAREP/Bank reviews which will be made every six months or at shorter intervals as data becomes available from the drilling and seismic work. ONAREP has agreed that it would not revise plans for drilling and geophysical work under the project without the Bank's consent. It has also agreed that it would not carry out additional exploration or appraisal  - 22 - activity within the Essaouira Appraisal Area prior to reviewing any such future plans with the Bank. 3.15 As several of the studies (reservoir, promotion, gas utilization and institutional) provided for in the proposed project represent follow-up stages to studies being undertaken under the current loan (para. 3.03), their precise scope and timing will be determined during project implementation following review of the results of the first study phase in each case. The detailed design for the pipeline and surface facilities will only commence after an appropriate level of reserves and well productivity are established, and assurances have been obtained at negotiations from ONAREP to this effect. ONAREP has also agreed to submit for Bank review all plans pertaining to the development of resources discovered or appraised under the proposed loan. Project Implementation 3.16 Overall responsibility. ONAREP will have the overall responsibility for implementing the project with the assistance of consultants whose qualifications, terms and conditions of employment will be satisfactory to the Bank and the Borrower. ONAREP has a competent and able top management and a well-established operational base, but still suffers considerably from shortage of experienced middle management in some important technical areas. The technical assistance components of the proposed loan are aimed principally at remedying this deficiency and will provide the key elements of reinforcement needed for sound project implementation. 3.17 To this end, prime responsibility for the implementation of all exploration activities in the Essaouira Appraisal Area will be assigned by ONAREP to a joint task force to be set up especially for this purpose and to comprise ONAREP personnel and an expatriate assistance team. The expatriate specialists forseen include: one senior explorationist (or technical team leader), one senior geophysicist, one senior subsurface geologist, one senior drilling engineer, one drilling engineer, one well completion and testing engineer, four drilling superintendents, and one coordinator: totalling 11 persons for two years duration. In order to ensure proper interfacing between the task force and supporting personnel/functions within ONAREP, and to maximize benefits from the transfer of know-how, each of the expatriates will be attached to an appropriate division within ONAREP (paras. 5.05-5.07) and will have as Moroccan counterpart either the division head or one of its personnel. Close coordination would be assured through a system for daily exchange of information and weekly meetings of the task force. A management committee (to meet at least once every two months) would be presided over by the Director General of ONAREP and would be responsible for overall review of results, assessment of exploration strategy, updating of the exploration/ appraisal program, and task force management. In addition, head office support would be provided by the technical assistance firm on special request. With a view to obtaining assistance from specialists with particular experience in the execution and management of gas and oil field operations, ONAREP requested proposals for this technical assistance component of the loan from several oil firms. The Bank agreed with ONAREP that oil companies would be better able than petroleum consultants to provide the assistance needed, particularly in regard integrated management of the Essaouira operations, replacement of personnel if, and when, necessary, and consultative head office support. Eight oil companies were approached, but only two proposals were  - 23 - received; and of these ONAREP selected the offer made by Elf-Aquitaine (France) (para. 3.32). The bid documents, selection, and contract terms were reviewed and agreed by the Bank. Agreement was also reached on the key expatriate members of the joint Elf Aquitaine/ONAREP task force who will be in-place by Board presentation, and assurances were obtained that the remaining members of the task force would be in-place by September 1, 1983. In order to help ensure that the key expatriate specialists can be on board as soon as possible, it has been agreed that initial funding for their services (up to about September 1983) would be provided under Loan S-18-MOR (para. 3.04). 3.18 Drilling. The drilling under the proposed project will be executed by ONAREP which will utilize for this purpose its four heavy duty rigs and labor. ONAREP's labor force would be reinforced through the contracting of about six skilled technicians to help man two of its rigs. These technicians will be supplied by FORASOL-FORAMER (France), an international drilling contractor with prior experience in drilling in Morocco, selected by ONAREP with the approval of the Bank (para. 3.32). All the drilling would be supervised by specialized members of the task force. 3.19 Force account is a technically acceptable and most cost effective alternative on the proposed project for the following reasons: (a) ONAREP's four heavy duty rigs are well suited for the depth envisaged and are in excellent condition; (b) during the course of this first project, ONAREP has encountered operational problems arising from difficult drilling conditions in the Essaouira basin and its own relative lack of experience in drilling and completing high pressure gas wells. However, these difficulties can be adequately surmounted through well placed assistance from external specialists with a proven record of performance in the areas of drilling, completion, testing, and geological evaluation of high pressure gas wells; (c) the provision of externally contracted technicians to help man two of the rigs will provide an additional assurance that ONAREP will upgrade its performance to international industry standards, as these rigs are expected to act as pace setters for the other drilling rig operations within the Essaouira Appraisal Area; and, (d) the other alternatives available to ONAREP would have been significantly more costly. ONAREP's costs for rig operations and maintenance under the proposed arrangements will total about $12.0 million (including about $2.0 million for the externally contracted drilling technicians and about $1.5 million for the four superintendents to be provided under the task force technical support contract). This is compared to an estimated total cost of $27.0 million which ONAREP would incur if it were to contract externally for all drilling rig and labor services required for the proposed project. 3.20 Geophysical Surveys, Studies and Training. The geophysical surveys (the seismic and the gravity and magnetics) will be conducted by foreign contractors under ONAREP's supervision. ONAREP has already selected CGG (France) as seismic contractor following an international competitive bid for these services, and Carson Geoscience (USA) as contractor for data acquisition on the airborne gravity and magnetics survey - the only company at present which can execute a combined survey of this type (para. 3.32). Both awards were reviewed and approved by the Bank. The studies (reservoir, gas utilization, promotion, institutional) and the engineering of pipeline and surface facilities will be executed by experienced engineering or consulting  - 24 - firms under contract to ONAREP on terms and conditions acceptable to the Bank (para. 3.31). The training program will be a slice of ONAREP's 1983-85 training plan and is detailed in Annex. 3.2. Implementation Schedule 3.21 The project implementation schedule is shown in Annex 3.3. It is anticipated that the drilling of the appraisal and exploration wells would be completed by end December 1984. Acquisition of gravity-magnetic data is expected to start in January 1983, and be completed by May 1983, and interpretation finalized by end November 1983. Seismic surveys are expected to start in March 1983 and to be completed and interpreted by end September 1985. The studies would be carried out during the period October 1983 to June 1985. The project is expected to be completed by December 31, 1985. Project Costs 3.22 The proposed project is estimated to cost an equivalent of US$106.2 million (including physical and price contingencies, duties and taxes and the capitalized front end fee) of which US$75.2 million or 71% represent the foreign exchange component. The cost estimate is based on early 1983 prices for contracts which have already been awarded (geophysical services, task force support, and the services of drilling technicians), and on budget estimates based on mid-1982 prices for the costs of drilling equipment and materials and other project components. _/ A physical contingency of 10% was applied to local and foreign costs with the exception of the gravity and magnetic survey which entails a well-defined work program. Price escalation for foreign costs has been assumed at 8% for 1982 and 1983, 7.5% for 1984 and 7% for 1985, and for local costs at 13.8% for 1982, 9% for 1983 and 1984, and 7.5% for 1985, with the exception of the contracts which have already been awarded for which no escalation was included for 1983. 2- 3.23 The project cost is in line with industry costs in developing countries, particularly if viewed in the light of the difficult drilling conditions and the remoteness of the project area from infrastructural facilities. Drilling costs were based on ONAREP's recent expenditures for drilling activities as well as upon budget estimates for imported materials and equipment. Costs for the geophysical surveys were based on the cost of the contracts which have already been awarded. In estimating the cost of technical support for the Essaouira task force and related studies a man-month rate of $22,250 was used reflecting the contract already signed with Elf- Aquitaine. 3/ This rate, though high, was deemed acceptable since ONAREP is seeking a high level of expertise from an operating oil company where the opportunity cost of personnel is high, and since the Elf-Aquitaine offer was 1/ Cost estimates were reviewed but left unchanged in March 1983 as no significant change in the cost of materials and services included in the project had occurred in the period since project appraisal. 2/ Contracts which extend beyond 1983 include a provision for price escalation in these subsequent years. 3/ Man-month rate based on per month average fee of $20,250 plus $2,000 for travel and subsistence.  - 25 - the best offer forthcoming from an oil company (para. 3.17). In estimating the cost of other studies and technical assistance, a man-month rate of $15,250 was used. 1/ Total man-months for the Essaouira task force support is estimated at 272 man-months. Total man-months for the contracted drilling technicians is estimated at 150 man-months, for (reservoir, promotional, market and institutional) studies at 70 man-months, and for pipeline design at 100 man-months. The cost of the training program was estimated on the basis of 215 man-months of fellowship training at an average cost of $4,650 per man- month, and ten weekly seminars at an average cost of $20,000 per seminar. (Annex 3.2). 3.24 The estimated project cost is shown in the following table. Annex 3.4 gives a detailed breakdown of the cost. Project Cost 2/ (Million US$) Local Foreign Total 1. Drilling 15.1 27.9 43.0 2. Completion and long duration testing 1.6 4.7 6.3 3. Seismic surveys 3.7 14.5 18.2 4. Gravity magnetic surveys 0.5 4.1 4.6 5. Essaouira task force support 0.8 6.0 6.8 6. Drilling technicians 0.3 1.8 2.1 7. Studies 0.8 1.8 2.6 8. Design of pipe line and surface 2.0 2.0 4.0 facilities 9. Training 0.5 0.7 1.2 Total base cost 25.3 63.5 88.8 Physical contingency 2.5 5.8 8.3 Price contingency 3.2 5.7 8.9 Total project cost 31.0 75.0 106.0 Front end fee - 0.2 0.2 Total 31.0 75.2 106.2 Project Financing 3.25 The proposed loan of US$75.2 million would finance 100% of the foreign exchange cost of all components of the project (see para. 3.28). Local project costs of US$31 million equivalent (DH 195.3 million) would be financed by the Government through annual budgetary allocations. 3.26 Due to competing claims on tight budgetary resources, the Government has at certain times in the last few years curtailed or delayed disbursement of allocated budget funds. In present-day markets for oil industry goods and 1/ Man-month rate based on per month average fee of $13,750 plus $1,500 for travel and subsistence. 2/ Includes duties and taxes of $9.1 million equivalent (DH57.3 million) estimated on the basis of a rate of 12.1% on all imported materials and services, and in the case of consulting services, costs of computer time, laboratory analysis and other supplementary services.  - 26 - services, delays in payments to supplier and service companies can easily lead to depletion of stocks, and long interruptions and/or slow-down of activity. In light of the priority accorded the rapid assessment of the commercial potential of the Essaouira Appraisal Area, it is important that every effort be made to ensure that ONAREP has sufficient funds to meet in a timely manner the project's financing requirements. For this reason, direct payments procedures for disbursement of proposed loan funds would be used whenever possible. In addition a commitment from the Government was obtained at negotiations that it would set the level of annual budgetary allocations to ONAREP, and disburse funds so allocated in such a manner as to ensure that ONAREP has, at all times, the cash required for adequate project implementation. In view of the stringency in regard budgetary funds, the Government has expressed the need to ensure that ONAREP does not withdraw more funds than it needs in practice on its on-going operations. To this end, assurances were also obtained from ONAREP that it will prepare all appropriate documentation needed to assess its project financing requirements, including cash budgets updated periodically in accordance with the actual schedule of commitments, payments and volume of work performed. As a first step in this direction, the Government and ONAREP were asked to agree on and submit to the Bank a projected timetable for the allocation and release of funds to ONAREP throughout the project implementation period. A detailed timetable for 1983 and summary timetables for 1984 and 1985 were reviewed during loan negotiations, and an understanding was reached that detailed timetables for 1984 and 1985 would be prepared (in a provisional form in October 1983 and October 1984, and final form in early 1984 and 1985) and submitted to the Bank for review and comments. 3.27 As in the first exploration project, it is proposed that the Bank loan be made to ONAREP with the guarantee of the Government of Morocco, in order to ensure that the funds provided by the Bank are clearly additional to the Government's contribution to the project. The loan would be made on normal country terms: a 17-year repayment period including four years of grace, and an assurance will be sought that the loan would be refinanced, in whole or in part, at the Bank's option, from a subsequent loan for development/production of petroleum resources identified or assessed under the proposed project. ONAREP would bear the foreign exchange and interest risks. However, given the nature of the proposed project, and ONAREP's near- term financial position (paras. 6.07-6.09), as for the current project assurances were obtained from the Government that (in addition to coverage of project costs) it will ensure that ONAREP has available, through its annual budgetary allocations, the funds required for the servicing of the proposed loan for as long as this would be required. 3.28 Possibilities for cofinancing for the proposed project have been explored by ONAREP and the Government. The Government has formally requested cofinancing of $10.0 million from the OPEC Fund; however, the Fund has informed the Government that no decision can be taken on its participation in the project until late 1983. As regards export credits, ONAREP is also presently discussing with Canadian agencies the terms and the maturities that might be offered on purchase of certain drilling materials in order to determine whether these would be appropriate for the project. As is the case for most exploration projects, commercial bank cofinancing is not likely to be available, particularly as ONAREP is still a non-revenue earning entity. As the availability of cofinancing is still uncertain, it is proposed that the  - 27 - Bank loan cover the full foreign exchange cost of the project. However, it was agreed during negotiations that, in the event appropriate cofinancing was obtained subsequent to Board Presentation and before December 31, 1983, the Bank would cancel the corresponding portion of the Bank loan. Allocation and Disbursement of Bank Loan 3.29 The proposed Bank loan of US$75.6 million would finance 100% of the foreign expenditures for all equipment, material and services, and training. In the case of consultant services, the option of loan financing of 80% of local costs is also allowed, in order to give the opportunity to local firms to compete for these services; however, such loan financing of local costs is not expected to exceed $4.0 million. Disbursement for geophysical and well services would be conditional on Bank approval of the detailed program of the surveys, well locations and drilling and testing programs (para. 3.14). 3.30 Disbursement of the Bank loan is expected as follows: IBRD Fiscal Year 1984 1985 1986 US$ million Increment 30.2 35.0 10.0 Cumulative 30.2 65.2 75.2 High rates of disbursement are foreseen for FY1984 and FY1985 since most of the physical work will be carried out during these years. Disbursement is expected to be completed by June 30, 1986. Annex 3.5 provides a detailed breakdown of the disbursement schedule. Procurement 3.31 The drilling, completion and testing of wells would be carried out by force account (ONAREP's own rigs and labor) with Bank financed goods, equipment and other service contracts (paras. 3.18 and 3.19). - Goods and services financed under the proposed Bank loan would be procured by international competitive bidding (ICB) in accordance with Bank guidelines, or through limited international tendering (LIT) for speciality equipment, materials and services provided only by few suppliers. The value of contracts procured under ICB would total $38.0 millio 27; the value of contracts procured under LIT would total $24 million -/. In addition, direct purchases, through ONAREP's own procedures, of spares and emergency equipment and services costing less than US$150,000 equivalent would be allowed up to an 1/ Force account work under the project is estimated at $12.8 million. 2/ $21.0 million for drilling equipment and materials, and $17.0 million for seismic surveys. 3/ $8.0 million for drilling goods, $11.0 million for drilling services and $5.0 million for geophysical services.  - 28 - aggregate amount of US$2 million (3% of the Bank loan). i/ All bid packages having value of US$500,000 or above would be subject to Bank review prior to contract award; other packages would be reviewed subsequently. Consultants services would be procured in accordance with Bank guidelines. 3.32 In order to accelerate the assessment of the Meskala gas discovery and to provide additional time for interpretation of the complex geological picture, advance contracting is needed for the geophysical work, technical assistance and some long delivery drilling equipment. The selection of contractors for Essaouira task force support, supply of drilling technicians, and geophysical surveys have already been made (paras. 3.17, 3.18 and 3.20) in accordance with Bank guidelines. Advance contracting for the remaining items will also be in accordance with Bank guidelines, and ONAREP is aware that all advance contracting is at its own risk. The total amount of advance contracting is estimated at $20 million, for which retroactive financing of $7.0 million (9.3% of the total loan) would be required. Training 3.33 ONAREP has prepared a comprehensive training program for the 1981-85 Plan period. As detailed in Annex 3.2, the proposed loan would finance both fellowship and in-country training for professionals and technicians for a total of 215 man-months of fellowship training plus 10 weekly seminars. Fellowship training would include short and long term duration courses in technical fields including geology, geophysics, drilling, drilling fluid technology, well completion, production, and reservoir engineering. In addition, the short seminars (of about one week duration) to be held in Morocco will enhance technical and administrative skills and assist ONAREP's staff in coping with specific operational problems. On-the-job training would be accomplished as ONAREP's professionals work closely with their foreign counterparts in the execution of the project drilling and seismic operating studies. The formal training program will be periodically reviewed and assessed during the course of project implementation. Reporting Requirements 3.34 An understanding from ONAREP was obtained during negotiations that project progress reports covering technical progress, costs, expenditure, disbursement and management and operations will be provided by the borrower to the Bank on both a monthly and a semi-annual basis. In accordance with industry practice, and in order to allow the Bank to reach an informed judgement on the progress of drilling and the locations of new wells (para. 3.14), weekly telexes summarizing drilling and testing status of the wells would also be sent to the Bank. An understanding with ONAREP has been reached on the format and content of these reports. Interim and final reports on various studies would also be submitted to the Bank. Meetings will be held 1/ ONAREP's procurement procedures are similar to the LIT procedures of the Bank; they allow, as an exception, procurement of spares and emergency equipment and services, through direct order to a single supplier after approval by ONAREP management and the Ministry of Finance.  - 29 - every six months, or at shorter intervals as needed, to discuss past results, future well locations and modifications to exploration strategy (para. 3.14). Ecology and Safety 3.35 The exploration and drilling operations will take place in a barren area of sparse population. Geophysical survey lines and drilling location would be so selected with a view to avoiding close proximity to habitation and water wells if and when they are present. Surface source water will be protected through the following of oil drilling and cementing industry standards. 3.36 Prospecting for and drilling through high pressure gas zones entails some risk of blow-outs and possibly fire. The risk is, however, minimized through the use of blow-out preventors, sophisticated instruments for monitoring traces of gas in the drilling fluid, and the enforcement of strict safety codes. ONAREP, in spite of some inefficiencies manifest in the progress of its drilling and testing operations, is quite aware of the risks involved and has maintained throughout the past several years an excellent safety record. IV. PROJECT RISKS AND JUSTIFICATION 4.01 The project carries technical and economic risks inherent in petroleum exploration. In assessing these risks it is important to bear in mind that the presence of natural gas and associated liquid condensates has been established already by the tests of the MKL-101 and MKL-102 wells. The uncertainties which remain relate to whether adequate reservoirs have been formed to allow (a) accumulation of these hydrocarbons in sufficient quantities and (b) their production at an economic rate. 4.02 The geologic risk in the project, therefore, involves principally two factors: the extent and quality of the Triassic reservoir. Even though the four Triassic penetrations in the Meskala area to date (TK-201, MKL-1, MKL-101, and MKL-102) have all encountered a productive reservoir, it is possible that the reservoir may prove to be of limited extent. Furthermore, the quality of the Triassic reservoir in the two wells tested to date (MKL-101 and MKL-102) is near the lower limit for commercial development in terms of sustained rates of productivity and drawdown of reservoir pressure. Offsetting the first of these factors is the possibility that other reservoirs, either in the Triassic or in the underlying Paleozoic, will be found elsewhere in the project area as a result of the proposed appraisal and exploratory wells. Offsetting the second is the fact that any appreciable improvement in the reservoir parameters in new wells would make possible substantial economic returns. In order to increase the prospects of finding better quality reservoirs, the project provides for nearby exploratory wells as well as Meskala appraisal wells. Moreover, care has been taken to minimize these risks through appropriate and flexible project design. The high resolution seismic survey plus carefully planned well locations and detailed analysis of reservoir rock characteristics and pressure performance on long duration production tests should provide the basis for an early determination of reservoir limits and productivity, and provision has also been made to  - 30 - allow for modifying the balance and specific location of the well drilling program on the basis of the initial geophysical and drilling results. Maintaining flexibility of this kind, will also minimize the risk that is posed by the possibility that the project may prove to be of inadequate scope to establish the basis for a subsequent economic development program, or conversely, the risk that it may be large and result in overdrilling. 4.03 An additional technical risk is posed by the possibility that, even given reasonable reservoir conditions, ONAREP cannot efficiently drill, test, and complete the deep high pressure gas wells in such a manner as to achieve their full productive potential. This risk has been minimized by the inclusion in the project of substantial technical assistance (para. 3.17). 4.04 The main economic risk is posed by the uncertainty as to the percentage of eventual recoverable (as opposed to in-place) reserves both in aggregate terms as well as in terms of the rate of their extraction. However, in light of currently available data, it is considered very likely that future drilling can establish recoverable reserves in the local Meskala area of 330 BCF of gas and 20 MM Bbl of associated liquids. For plateau production as indicated in the table below, total investment requirements for exploration and development of such reserves can be estimated in present value terms (at 10% discount rate) at about US$404 million, and the net present value on the program at about US$286 million. The rate of return on the investment would be 24% (Annex 4.1). This is calculated on the basis of high drilling costs in Meskala (a per well estimate of about 1982 US$6.0 million), of low productivities and recoveries per well (a maximum production rate per well of 3 MMCFD and 190 BD and total reserves recoverable per well of about 7 BCF and 0.6 MM Bbl of liquids), and on the assumption that presently holding petroleum prices will remain constant (in real terms) throughout the production life. A Meskala Reserves and Production Scenario Recoverable reserves NPV at 10% (in US$ million) Gas (BCF) 330 Gas production (at US$3.5/MCF) 531 Liquids (MM Bbl) 20 Liquids production (at US$30/Bbl) 273 Total (million TOE) 11 Total output 804 Plateau production Exploration & development wells 282 Field facilities and pipeline 122 Gas (MMCFD) 90 Operating costs 114 Liquids (MBD) 5.4 Total costs 518 Total (million TOE p.a.) 1.1 Net present value 286 Relative proximity of Meskala to potential gas consumers, and the high proportion of condensates contained in the gas, are positive factors influencing the economics of a possible development of Meskala. However, even with 50% less liquids in the production than in the case cited above, the estimated rate of return on investment is over 18%. Acceptable rates of return are achieved for other probable scenarios assuming gas reserves in the Meskala area of 50% less than indicated above and (except for the worst reserves case considered) for a scenario assuming a 15% decrease in price below recently established levels (Annex 4.1). These estimates do not take  - 31 - into account the possible presence of gas over a large area in Essaouira, possible production from the Paleozoic or possible improvement in the proven Triassic reservoir. On the other hand, if the reservoir deteriorates away from the discovery, or is absent, the prospects for an economic development of Meskala would be limited. The proposed program is designed to appraise the discovery and, at the same time, explore other portions of the regional Meskala horst. It is considered to be best suited to resolve these uncertainties, and will provide for an evaluation of the discovery and potential extensions in the shortest time and least costly manner. Overall, the investment risk involved in the exploration program is judged to be reasonable given the encouraging results to date for an economic development of Meskala and the implications for Morocco's future energy investment strategy. 4.05 The promotional components of the proposed project, principally the reconnaissance geophysics and the technical assistance, are designed to attract new investment in exploration in Morocco. While it is not certain that new foreign investment would be forthcoming even with this additional information, the active encouragement and promotion of new investment in exploration along the lines proposed represents a justifiable strategy for Morocco given its promising potential. To the extent this effort to interest foreign companies is successful, this will (i) increase the exploration investment and provide additional information with regard the petroleum potential of Morocco; (ii) accelerate the discovery of commercial hydrocarbons;, and (iii) relieve ONAREP from spreading its resources over extended aKeas of the country and make it possible for it to focus on the immediate problem of evaluating the Meskala gas area. V. THE BORROWER Background 5.01 The borrower of the proposed loan, L'Office National de Recherches et d'Exploitations Petrolieres (ONAREP), is Morocco's recently established national oil and gas, and oil shale, exploration and production company. As such, ONAREP is the successor in the petroleum and oil shale fields of the Bureau de Recherches et de Participations Minieres (the State enterprise which had, from 1958 to 1981, been responsible for both petroleum and minerals exploration and development), and has had transferred to it through Government decisions all BRPM's technical staff, assets, and operations in petroleum and oil shale activities. 5.02 ONAREP was instituted as a wholly-owned public enterprise by the Dahir (law) of November 10, 1981. This Dahir is complemented by a Decree of November 29, 1982, governing the framework for ONAREP's administration and management. These laws also make ONAREP subject to the decrees of April 14, 1960 and June 30, 1962, which regulate the State's financial control of all public or State-funded commercial establishments. Statutory Functions and Administration 5.03 ONAREP is authorized through its statutes to undertake all industrial, commercial and financial activity compatible with the objective of accelerating development of indigenous petroleum and oil shale resources. To  - 32 - this end, it can (i) explore for and exploit such deposits; or (ii) form or take participation in companies, or promote any action by companies, aiming at either the exploration, development, treatment, or commercialization of hydrocarbons and oil shale. 5.04 ONAREP operates under the tutelage of the Ministries of Energy and Mines and of Finance, and is governed by an Administrative Council and a Committee of Directors. The Administrative Council is headed by the Prime Minister (as President), and includes as members the Ministers of Energy and Mines, Finance, Planning, Interior, Commerce and Industry, Transport, Equipment, Labor, and the Head of the governmental authority for economic affairs. The Committee of Directors is headed by the Minister of Energy and Mines and includes the Ministers of Finance and Planning, the Head of the economic affairs authority, or their representatives. Management and Functional Structure 5.05 The responsibility for managing ONAREP rests with a General Director, assisted by a Secretary General. Since his assumption of his post with the institution of ONAREP, ONAREP's General Director has re-organized the company into two Directorates (for petroleum exploration and for technical operations), and three divisions (for oil shale, financial, and administrative affairs). The two Directorates, who will have prime responsibilities in the execution of the proposed project, are organized along functional lines as described in the following paragraphs (see also Annex 5.1). 5.06 The Direction de l'Exploration Petroliere (DEP) comprises three basic divisions: (i) the division for regional exploration which consists of teams of geologists and geophysicists assigned to each of several regional basins onshore and offshore who are charged with the study, planning, or supervision of exploration work in these areas; (ii) the division for subsurface studies which is charged with the geological supervision of wells drilled either by ONAREP on its own or by ONAREP's partners; and (iii) the division for petroleum participations whose functions include the promotion of foreign participations in exploration and production, the administrative follow-up of joint-venture agreements, and the economic study of petroleum prospects. In addition to these three divisions, the Directorate includes two Departments (for geophysics and surface geology) and two services (for mapping and documentation). 5.07 The Direction Technique (DT) has four divisions: (i) the drilling division which is charged with the responsibilities of design and supervision of drilling, well testing, and completion operations; (ii) the drilling operations division which executes these programs; (iii) a production division responsible for the planning and supervision of petroleum development projects, atd (iv) an equipment division which procures and maintains equipment and consumables and provides other general logistics support. In addition to the four divisions, this Directorate spans a department for administration (in charge inter alia with the management of ONAREP's drilling school), and a service for technical studies.  - 33 - Institutional Capabilities, Staffing and Training 5.08 At present, ONAREP has a total of nearly 1,000 employees of whom about 90 are geologists/geophysicists or engineers. The Direction Technique has the major share of personnel, about 615, including 23 engineers, and 10 drilling crews. The Direction de l'Exploration Petroliere is next in line with about 140 employees, including 40 professionals. 5.09 Except for a small number of expatriates, almost all of ONAREP's permanent employees are Moroccan. In addition, three teams of expatriate petroleum specialists are now working within the organization under two-three year bilateral assistance contracts: (i) a team of six Soviet geologists working since 1981 on special studies within the DEP; (ii) a team of six Rompetrol geologists and engineers working individually for several DEP divisions also since 1981; and (iii) a team of five US specialists in Rabat since September 1982 supported by US Aid under a contract with the Bechtel Corporation. The US team is constituted by a senior geologist (who is acting as advisor to the director of the DEP), a senior geophysicist, a senior drilling engineer (who is acting as advisor to the director of the DT), a senior production engineer, and a team coordinator. 5.10 The above external assistance is expected to help ONAREP cope with some of the general institutional problems which it has faced: (i) a relatively thin staff, particularly at middle-management levels; (ii) a competent but over-extended senior management stretched by the need to handle day-to-day operational concerns; and (iii) a mostly young technical staff who must rely primarily on experience gained in prior BRPM exploration (as opposed to field development) oriented activities within Morocco. The scope of the work needed to rapidly assess the prospectiveness of the project area, the special technical difficulties posed by the high pressure gas formations in Essaouira, and the need to ensure a high level of managerial and technical coordination of the work to be performed, have led ONAREP to request additional special assistance Lhrough the proposed loan for the technical support to be integrated into the task force constituting the Essaouira Appraisal Area management team. As detailed in para. 3.17, this joint task force is expected to include eleven expatriates spanning the range of disciplines needed to supplement ONAREP's personnel in the management and follow-up of Essaouira area operations and will provide the key elements of reinforcement needed to ensure efficient execution of the Essaouira program. 5.11 The consultancy services for exploration promotion provided for under the proposed loan are designed to bolster ONAREP in a parallel but ultimately equally important area of its responsibilities. ONAREP is also counting on the experience to be gained by its personnel working alongside the expatriate specialists and, for the medium-term, on the transfer of know-how through expected future joint activities with its foreign partners. Within the context of the expansion in petroleum activity envisaged in the 1981-85 Plan (para. 1.33), it also has an ambitious five-year master plan for training of a number of its personnel through short or longer term courses in petroleum institutes and universities abroad. Assistance provided through the training component in the proposed loan would support an essential first phase of the overall training program; and a follow-up review of remaining needs is planned within the context of the Institutional Study (para. 5.18-5.20).  - 34 - Accounts, Control and Audit 5.12 Moroccan accounting is based on and follows the French Plan Comptable of 1957. The system allows clear and certain interpretation of the content of any particular account, and there has been no significant difficulty in adapting it to the specific needs of the petroleum sector. In parallel with its general accounts, ONAREP also keeps both budgetary and analytical accounts. Neither of the latter accounts have provided in practice, however, a sufficiently adequate basis for management information and follow-up of current operations. For this reason, an overall review of ONAREP's accounting and budgeting practices, and recommendations for an improved management information system, is also included in the work assigned the management consultants under the Institutional Study. - 5.13 ONAREP must submit to a strict control by the State on all decisions or transactions of any financial impact. The principal features of the system are (i) prior approval of annual budgets; and (ii) tight control in budget execution through a priori screening of all commitments and expenditures. As for other public or State-funded institutions, the control is exercised by the Minister of Finance, Ministry divisions, an ONAREP Controller (appointed by the Minister) and "Agents Comptables" (appointed by ONAREP on the Minister's recommendation). The Minister of Finance holds the prerogative of approval of budgets, and the Controller, the Ministry's prime agent for control of ONAREP, the responsibility for a priori approval of all proposed commitments. He must agree to all awards of contracts of any significance, and must ensure that the goods or services are provided for in the budget and that ONAREP has sufficient credits to cover the expense. The Agent Comptable's prime responsibility is to countersign and screen every payment order, for proof that the goods and services were procured in accordance with the rules and that the funds were appropriately committed. 5.14 The control system is generally rigidly applied, wide-ranging and time consuming, and has proved, in the past, particularly costly for a company like ONAREP which must, to become more efficient, align its procurement and payments practices to those generally holding in the international market for oil industry goods and services. There is, at present, however, a growing recognition within the Government of the inefficiencies generated by such strict a priori State financial control, and a special concern lest a rigid application of the rules delay progress in the assessment of the Meskala discovery. Special instructions have recently been given by the Prime Minister and the Minister of Finance to Government staff to streamline procedures and curtail unneccessary delays in the case of ONAREP, and substantial improvement has since occurred on several fronts: procurement and purchasing, staffing, and timing for approvals of payments and budgetary appropriations, among others. Whereas at one point, the set of procedures constituting the control system was expected to have a marked negative impact on the progress of ONAREP's work, the improved situation appears, for the present, to be satisfactory. Further improvement in this domain will also be sought through the Institutional Study, which will help ONAREP to prepare itself for an eventual change to a system of a posteriori control, presently being considered for it by the Government.  - 35 - 5.15 As currently practiced, financial control by the State also encompasses a posteriori control of results through (i) monthly and annual comparison of the three sets of distinct accounts kept by the company, its controller, and the Agent Comptable; and (ii) annual review of these accounts by the Ministry of Finance and the Cour des Comptes. In addition to this, Loans S-18-MOR and 2114-MOR require annual audits by independent auditors of the Borrower's accounts, and during negotiations of the proposed loan ONAREP will be asked to continue to have its annual financial acccounts audited by independent auditors satisfactory to the Bank, and to submit to the Bank its audited annual accounts not later than six months after the end of each financial year. 5.16 The first accounts that were submitted for audit by the BRPM (the original borrower for Loan S-18-MOR) were for FY1981. However, these accounts could not be certified by the auditors principally because of delays in the taking of physical inventories and lack of adequate documentation on BRPM's investments in mining subsidiaries (a significant proportion of its asset base) and its position on suppliers and clients accounts. BRPM is no longer a Bank borrower; nevertheless the BRPM and the Government have both been urged to remedy this situation in view of the importance of the BRPM as public holding company in the mining sector. 5.17 All assets and liabilities relating to ONAREP's operations were transferred from BRPM to ONAREP by virtue of the Dahir of November 10, 1981, and subsequent Government decrees, and have been incorporated into ONAREP's opening balance sheet as of January 1, 1982. The auditors have been asked to review this balance sheet. As a result, they have developed a plan of action to enable ONAREP's accounts to be the subject of a qualified opinion regarding certain inventories and assets by December 31, 1982, and expected to be the subject of an unqualified opinion as at December 31, 1983. ONAREP and the Government have agreed to this plan 1/, which is currently being implemented, and on this basis the Assumption Agreements for Loan S-18-MOR (which substitute ONAREP for BRPM as borrower for the loan) have been made effective (para. 3.04). However, in order to ensure against delays in the implementation of the action plan, an additional assurance that ONAREP will complete execution of the plan by end-1983, was obtained at loan negotiations. The Institutional Study 5.18 The technical assistance cited in paras. 5.10 and 5.11 above is designed principally to ensure that ONAREP is able to assume the expanded responsibilities entailed in the execution of a project of the proposed scope and magnitude. In parallel with this, the Government, ONAREP and the Bank have agreed that substantial benefits can also be derived from an expert reassessment of ONAREP's present institutional setting, objectives and capabilities and the setting of a plan of action for the company's transformation and development in the future. This is in line with the 1/ Principally covering: (i) physical inventories of fixed assets and stocks; (ii) justification of suppliers' and clients' accounts; and, (iii) clarification of total tax liabilities for 1982 and prior years.  - 36 - Government's intention of exploring all the options available to it in accelerating exploration and development of domestic oil and gas resources, and ONAREP's need to ensure that it prepares itself within the coming few years to better fulfill the role (or roles) assigned to it in this domain. 5.19 The first phase of the institutional study is being funded through the current petroleum exploration loan; and is being carried out for ONAREP by Arthur D. Little Inc. (USA). As per their proposal, the consultants' work will proceed in five, more or less sequential steps: (i) a clarification of measurable objectives for the company in light of the general objectives cited in its statutes, its local and external environment and the nature of the oil industry; (ii) a detailed technical assessment, in light of these objectives, of all of ONAREP's present operations, and exploration of possible future operations (such as the development and marketing of gas); (iii) an evaluation of ONAREP's present management systems; (iv) selection for the Government and ONAREP's consideration of one or more optimal organizational schemes for the future covering a five year strategy for ONAREP, and general recommendations vis a vis the relationship of the company to the Government, and other public enterprises, the range of the companies' activities, the methods of its financing, its overall organizational structure, and responsibilities of its senior management; and finally, (v) preparation of a final detailed set of recommendations vis a vis the companies' operational priorities, institutional setting, structure, management systems and procedures, staffing and personnel development. This first phase of the study, which commenced in January 1983, is expected to require between four to six months and should therefore be completed by end June 1983. 5.20 A provision is included in the proposed loan for a second or implementing phase for the institutional study aimed at providing ONAREP with the assistance required to put into place the consultants' recommendations. Detailed terms of reference for this work will be developed by Arthur D. Little as part of the first phase study, and will be reviewed by ONAREP and the Bank prior to commencement of this work. Insurance 5.21 ONAREP is insured with insurance companies in Morocco (who are in turn reinsured in the international market) against third party liability arising from accidents attributable to its operations. It has also adequate coverage with such companies for its rigs and surface facilities in the event of blow-outs, fire or cratering. An understanding has been reached with the Government and ONAREP that in case of such blow-outs, fire or cratering, ONAREP will be able to mobilize rapidly, either through budgetary advances or complementary insurance, the funds needed to cover costs for the control of the wells and redrilling, as well as clean-up costs and pollution liability.  - 37 - VI. FINANCIAL ASPECTS Current Financial Position 6.01 Opening Accounts. ONAREP's opening balance sheet as of January 1, 1982 is as follows: Summary Opening Balance Sheet as of January 1, 1982 DH million US$ million _ Net plant 88.9 14.1 18 Petroleum Exploration & Oil Shale 273.1 43.3 56 Investment in Affiliates 35.8 5.7 7 Working Capital 90.4 14.4 19 Total Assets 488.2 77.5 100 Government Equity 404.7 64.2 83 Provision for Pension Funds 12.3 2.0 2 Long-Term Debt 71.2 11.3 15 Total Liabilities 488.2 77.5 100 6.02 Capitalization. Due to a long-standing Government policy to finance as much as possible of the national petroleum exploration effort through budgetary resources (and to the nature of the previously holding disbursement procedures under the current petroleum loan 1/) 83% of ONAREP's capital, as of January 1, 1982, was represented by Government equity. The debt incurred under the current petroleum loan, as of end 1981, represented the remaining major share of ONAREP's total capital. ONAREP's initial capitalization is sound. 6.03 Assets. As of January 1, 1982, net investment in petroleum exploration and oil shale studies amounted to about DH273 (US$43) million, or 56% of ONAREP's total assets; about DH56 (US$9) million of this sum represented expenses incurred on oil shale research and development, and about DH217 (US$34) million net expenditure on petroleum exploration. ONAREP follows (as did BRPM in prior years) accepted standards of writing off unsuccessful exploration costs against equity. The net value of the petroleum exploration investment is therefore indicative of expenditure which has not yet been deemed unsuccessful. Of the above total sum, about DH126 (US$20) million is attributable to the exploration effort in Essaouira, about DH55 (US$9) million principally to seismic and studies on several other onshore areas (Boudnib, the Hauts Plateaux, Ksabi and Aknoul, etc.), and about DH36 (US$5) million to drilling and seismic work carried out either by ONAREP on its own or through joint-ventures with APEX in the Gharb basin (para. 2.12). 1/ Which (until modified in late 1981) allowed withdrawals from major loan categories only for reimbursement of expenditures already incurred (para. 3.04).  - 38 - A large proportion of this activity was supported through the current petroleum exploration loan. 6.04 At present, ONAREP has only one affiliate, SCP, which it holds jointly on a 50%-50% basis with a French Group in which SNEA is a major partner. As of January 1, 1982, the value of this holding amounted to about DH36 (US$6) million, or 7% of ONAREP's total assets. 6.05 Net plant as of January 1, 1982 amounted to about DH89 (US$14) million, or 18% of total assets. About DH28 (US$5) million of this sum represented drilling rigs and other equipment directly pertaining to well drilling and seismic data acquisition operations, and about DHlII (US$2) million investment to date in Toukimt development facilities (para. 2.14). 6.06 Working capital, as of January 1, 1982, amounted to about DH90 (US$14) million or 19% of total assets. This consisted of about DH94 (US$15) million in inventories (mostly consumables for oil and gas wells); about DH91 (US$14) million in other short term assets (about 60% in clients and other receivables, 30% in budgetary allocations, and 6% in cash and banks); and about DH95 (US$15) million in current liabilities (about 48% in suppliers and other creditors, 12% in fees and taxes, and 40% in short-term loans). Future Finances 6.07 The 1982-84 period. Over the medium- and longer-term, ONAREP is expected to be in a position to benefit very favorably from a possible commercial production of gas and condensates from Essaouira (and/or any potential successful petroleum exploration investment by one of its foreign partners). Nevertheless, confirmation of the commerciality of Meskala will need to be preceded by an intensified exploration and appraisal drilling effort. ONAREP's finances in the upcoming two-year period covering project implementation will thus continue to be characterized by: (i) expanding expenditures in exploration and studies, entailing parallel requirements for the upgrading of plant, maintenance of adequate levels of inventories, and of liquidity; (ii) a relatively minor income generation capability relying almost exclusively on revenues from small gas fields shared with Apex and on small profit from work (mostly hydrological drilling) performed for third parties; and (iii) the need, therefore, to rely for the financing of a major share of requirements on Government equity funds. ONAREP's projected requirements for the 1982-84 period, and sources of financing, can be summarized as in the following table (see also Annex 6.1):  - 39 - Summary Financing Plan 1982-84 In US$ In DH million million FY82 FY83-84 Total Total Investment Petroleum Exploration 210.0 870.0 1,080.0 171.4 Oil Shale Studies 62.0 145.0 207.0 32.9 Plant 81.0 655.0 736.0 116.8 Working Capital 47.0 105.0 152.0 24.1 Total Investment 400.0 1,775.0 2,175.0 345.2 Sources Internal Funds 41.0 116.0 157.0 25.0 Less Debt Service (26.0) (106.0) (132.0) (21.0) 15.0 10.0 25.0 4.0 Borrowings 159.0 786.0 945.0 150.0 Budgetary Appropriations 226.0 979.0 1,205.0 191.2 Total Sources 400.0 1,775.0 2,175.0 345.2 6.08 ONAREP's requirements for the 1982-84 period are expected to total DH2,175 (US$345.2) million, spanning DH1,080 (US$171.4) million for petroleum exploration (50% of the total), DH207 (US$32.9) million for oil shale studies (9%), DH736 (US$116.8) million for plant, including some development investments (34%), and DH152 (US$24.1) million for working capital (7%). About 44% of requirements would be financed through loans (principally the two Bank loans for petroleum exploration and the Bank loan for oil shale studies) and the remainder (55% of the total) by the Government budget. 6.09 In order for ONAREP to carry out its petroleum and oil shale programs efficiently, it would need to ensure that it can maintain, at all times, an adequate level of liquidity. The most appropriate measure of liquidity for the company would be its quick ratio. With the view to helping ONAREP maintain a sound financial position, assurances were obtained during loan negotiations: (i) from ONAREP that it will take all necessary measures within its power (including preparing all appropriate documentation needed to periodically assess its liquidity position) to maintain, at all times, a quick ratio of not less than 1.0; and (ii) from the Government that it would set the level of its annual budgetary allocation to ONAREP, and disburse funds so allocated, in such a manner as to ensure that ONAREP can maintain the financial standard set above. 6.10 Longer-term Prospects. Success on ONAREP's exploration and appraisal efforts, and/or on exploration investments by foreign partners, would make possible a transformation of ONAREP from an essentially exploration entity into a revenue generating production company. Development projects would, however, also require significant initial outlays of funds. No reliable year by year projecting of the timing and magnitude of future development investments, of financing requirements, and of benefits can yet be made. As  - 40 - for the first project, assurances have been obtained from ONAREP that it will submit to the Bank for review, any plans pertaining to the development of resources discovered or appraised under the proposed loan (para. 3.15). In addition, in order to help ensure that ONAREP's capitalization remains satisfactory, assurances from the Government were obtained during loan negotiations that it will not convert to debt any portion of its equity contribution in ONAREP, without prior review of its plans with the Bank. Moreover, within the context of arrangements agreed under the first petroleum project, a Bank reassessment of ONAREP's finances is scheduled for no later than March 31, 1984, the date for the end of the grace period on Loan S-18- MOR. By that time, the Bank will decide whether the loan would be refinanced, in whole or in part, from a subsequent loan for development/production of petroleum resources identified under the first project. 1/ The proposed project will provide the key data inputs to such an assessment and is expected to be, by early 1984, sufficiently well advanced to permit a satisfactory appraisal of ONAREP's future finances. VII. AGREEMENTS REACHED 7.01 Assurances were obtained, during negotiations: (a) from ONAREP that: (i) drilling of the three step-out appraisal wells would not commence prior to the interpretation of the high resolution seismic data (para. 3.14); (ii) exploration programs would be agreed on a semi-annual, or as needed, basis and would not be altered without the Bank's consent (para. 3.14); (iii) it would not carry out additional exploration or appraisal activity within the Essaouira project area prior to reviewing any such future plans with the Bank (para. 3.14); (iv) studies would not commence prior to Bank review, and in particular, detailed design of the pipeline and surface facilities would not commence until an appropriate level of reserves and well productivity are established (para. 3.15); (v) it will submit to the Bank for review any plans pertaining to development of resources discovered or appraised under the project (para. 3.15); 1/ Loan S-18-MOR was made on terms and conditions similar to those applied by the Bank at the time to engineering loans (i.e. a period of ten years including a grace period of four years) with the provision that the term of the loan would be extended to seventeen years if the exploration project did not lead, by March 31, 1984, to a development project suitable for Bank financing.  - 41 - (vi) the Essaouira task force will be fully staffed by September 1, 1983 (para. 3.17); (vii) it will periodically prepare and update all documentation needed to assess its project financing requirements (para. 3.26); (viii) it will have its annual accounts audited and submitted to the Bank no later than 6 months after the end of the calendar year (para. 5.15); and, (ix) it will execute and complete by end-1983 an action plan to resolve outstanding questions on its financial accounts (para. 5.17) (x) it will take all necessary measures within its power to maintain, at all times, a quick ratio of not less than 1.0 (para. 6.09); and, (b) from the Government that: (i) it will provide ONAREP, in a timely manner, with sufficient funds to finance project costs, service the proposed loan and maintain at all times a quick ratio of at least 1.0 (paras. 3.26, 3.27 and 6.09); and (ii) it will not convert to debt any portion of its equity contribution in ONAREP without prior review of its plans with the Bank (para. 6.10).  - 42 - ANNEX 1.1 MOROCCO Principal Power Stations Nominal Installed Generating 1981p 1981p Capacity Capability Production Fuel Consumption (MW) (Thou TOE/yr) (Thou TOE) (Thou TOE) Thermal a/ Mohammedia 300 27 e/ 27 23 Fuel Oil Kenitra 300 515 - 447 429 Fuel Oil Roches Noires b/ 120 206 168 168 Fuel Oil Jerada 165 283 286 350 Coal Smaller ONE plants c/ 150 185 71 93 Fuel Oil 3 Gas Oil Independent producers & isolated centers f/ 182 178 116 87 Fuel Oil Subtotal 1,217 1,394 1,115 (Normal (Dry Year) Year) _Hydro Bine el Ouidane 135 65 45 31 Afourer 94 129 105 103 Im Fout 31 47 17 19 Sidi Cheho 128 81 30 35 Smaller ONE plants d/ 225 156 117 63 Independent producers 10 4 2 3 Subtotal 623 482 316 254 Total 1,840 1,876 1,710 1,369 a/ Excludes a total of 62 MW cold reserve at Roches Noires (Unit I), Oujda, and Sidi Kacem (diesel plant), and Tangier (diesel plant). b/ Located in Casablanca Unit II (60 MW) is able to burn some coal and is being re-converted to coal. c/ Three gas turbine stations of 40 MW each at Agadir, Tangier, and Tetouan, a 16 MW gas turbine at Sidi Kacem (to be placed on cold reserve as of end 1981) and 14 MW of isolated diesel plants. d/ About 15 plants. e/ To build up to 515 thousand TOE by 1983 and doubling to 1030 thousand TOE as Units III and IV (designed to burn coal) enter service 1984-1986. f/ These figures are Bank estimate.  - 43 - ANNEX 1.2 MOROCCO PETROLEUM EXPLORATION AND ESSAOUIRA APPRAISAL PROJECT Alternative Primary Energy Supply Patterns and Projected Import Costs (million TOE except as noted) Low Demand Forecast High Demand Forecast 1985 1990 1995 1985 1990 1995 Total Demand 5.3 6.7 8.6 6.1 8.9 13.1 Less Hydro, & other existing supplies 0.9 1.3 1.8 0.9 1.4 1.8 Remaining Requirement Z4. 5.T 6.8 5. 7.5 11.3 Possible Supply Options 1. Base Case: Crude Oil Imports 4.4 5.4 6.8 5.2 7.5 11.3 Import Cost (1981 $billion) 1.1 1.5 2.1 1.3 2.1 3.5 2. Coal Case: Coal Imports 0.5 0.7 1.8 0.6 1.6 4.0 Crude Oil Imports 3.9 4.7 5.0 4.6 5.9 7.3 Import Cost (1981 $ billion) 1.0 1.4 1.8 1.2 1.8 2.8 3. Gas/Coal Case: New Natural Gas - 1.9 3.0 - 2.9 3.0 Condensates - 0.3 0.4 - 0.4 0.4 Coal Imports - - 0.1 - - 2.4 Crude Oil Imports 4.4 3.2 3.4 5.2 4.2 5.5 Import Cost (1981 $ billion) 1.1 0.9 1.0 1.3 1.2 2.0 Notes: Assumed prices in 1981 $/TOE for oil 240 in 1985, 276 in 1990 and 305 in 1995 and for coal 127 in 1985, 133 in 1990 and 140 in 1995. Prices include $10/TOE (oil) and $45/TOE (coal) margins above projected prices f.o.b. (OPEC average for oil, Hampton Roads, U.S. for coal).  MOROCCO Projections of Potential Markets for "new" NaturalGas and Coal Imports, 1980-1995 (Thousand TOE except as noted) Actual j Low Demand High Demand L ine 1980 1985 1990 1995 1985 1990 1995 Electricity Generation 1 - Final Demand and Losses 1195 1675 2406 3453 1924 3169 5222 2 (-) Ilydro and Inflexible Thermal 788 924 1285 1330 924 1285 1330 3 Potential Gas Market 407 751 1121 2123 1000 1884 3892 4 Potential Coal Market 23 0 92 1094 0 855 2863 Direct Boiler Fuel 1Market 5 Final demand 1083 1196 1455 1770 1382 1939 2719 6 (-) Existing Non-oil. 101 150 200 267 150 200 267 7 Remnaining Market 982 1046 1255 1503 1232 1739 2452 8 Potential Gas MarketW (60%) 589 628 753 902 739 1043 1471 l 9 Potential Coal Market (45%) 442 471 565 676 554 783 1103 4 Totals 10 Potential Gas Market 996 1379 1874 3025 1739 2928 5363 11 (in MMICFD) (112) I (155) (210) (340) (195) (329) (602) 12 Potential Coal Market 465 471 656 1770 554 1638 3966 13 (in thtousand Tpa) (785) (Y95) (1109) (2992) ( 937) (2768) (6703) Notes: (line 2) Hydro: 410, 741, and 1006 thousand TOE in 1985, 1990, and 1995, Jerada coal: 284 thousand TOE throughout. Oil-fired thermal: 160 thousand TOE in 1985 and 210 thousand TOE in 1990. (line 4) Line 3 less 1029 thousand TOE generated at Kenitra and Mohammedia I and II, which cannot burn coal. (line 6) Existing gas and imported coal supplies: 71 thousand TOE. Jerada coal: 79, 129, and 246 thousand TOE in 1985, 1990, and 1995.  45 -ANNEX 1.4 MOROCCO Commercial Energy Prices (June 1982; 5.82 DH/$) Product Unit DH/Unit Units/TOE DH/TOE $/TOF of C-parator Refined Products: a/ Super liter 4.45 1315 5850 1005 238 Regular liter 4.25 1315 5590 960 235 Kerosene liter 2.10 1265. 2660 457 100 Gas oil liter 2.40 1205 2890 497 137 Fuel oil kg 1.32 1060 1400 241 120 LPG kg 2.55 950 2425 417 103 Domestic Coal: Raw fines kg 0.223 2000 445 76 76 Washed fines kg 0.323 1360 440 76 76 Imported Coal: Steam Coal c/ kg 0.804 1690 1360 233 . 142 Electricity: d/ Low Voltage kWh 0.500 4050 2025 348 46 lIedium Voltage kWh 0.454 4050 1840 316 61 High Voltage kWh 0.340 4050 1375 237 57 a! Comparators are end-June 1982 import parity prices (Caribbean posted prices plus $20/TOE estimated freight and insurance to Mohammedia plus handling costs of 5