India - Western Gas Development Project

Document of Thz. World Bank FOR OFFICIAL USE ONLY Report No. 6503-IN STAFF APPRAISAL REPORT INDIA WESTERN GAS DEVELOPMENT PROJECT January 11, 1988 Asi2 - Country Department IV (India) Transport and Energy Operations Division This document has a reslticted d1striHb and may be used by reciients only fb the pomnce of ther oficdal duties Its contents may not otherwise be diosed wiout Wodd Bank au a  CURRENCY EQUIVALENTS Currency Unit Rupee (Rs) Rs 1 100 Paise US$ 1 Rs 13.0 Rs 1 US$0.0769 Rs 1 million US$76,923 The US$/Rs exchange rate is subject to change. Conversions in this report have been made at US$1 to Rs 13.0, which represents the projected exchange rate over the disbursement period. FISCAL YEAR April 1 - March 31 MEASURES AND EQUIVALENTS 1 Metric Ton (mt) 1,000 kilograms (kg) 1 Metric Ton (mt) 2r2O4 Pounds (lb) 1 Meter 3.28 Feet 1 Kilometer (km)3 0.62 Miles 1 Cubic Meter (m ) 35.3 Cubic Feet (cft) 1 Barrel (Bbl) 0.159 Cubic Meter, 42 gallons 1 Metric Ton of Oil (330 API) 7.3 Barrels ; Normal Cubic Meter (Nm3) of Natural Gas 37.32 Standard Cubic Feet (SCF) 1 Kilocalorie (kcal) 3.97 British Thermal Units (Btu) 1 MW 1,000 kilowatts 1 kWh kilowatt-hour 1 GWh = 1 Million kWh 1 Bbl/d I 1 Barrel per day PRINCIPAL ABBREVIATIONS AND ACRONYMS USED Bbl/d - Barrels per day BMC (BCF) Billion cubic meters (feet) DEA = Department of Economic Affairs, Government of India EIL - Engineers India Limited ERR - Economic rate of return GAIL 8 Gas Authority of India Limited GOI - Government of India GOR - Gas-oil ratio HBJ - Hazira-Bijaipur-Jagdishpur Gas Pipeline LPG = Liquefied petroleum gas MCM = Million cubic meters MCMD (MCFD) = Million cubic meters (feet per day) MMCMD (MMCFD) Million cubic meters (feet) per day MMtoe - Million tons of oil equivalent mtpy = Millions of tons per year NGL - Natural gas liquids NPV - Net present value OI. = Oil India Limited ONGC - Oil and Natural Gas Commission toe = (Metric) ton of oil equivalent tpd = (Metric) ton per day tpy = (Metric) ton per year TCF = Trillion cubic feet  FOR OMCIL USE ONLY INDIA WESTERN GAS DEVELOPMENT PROJECT Loan and Project Summary Borrower: Government of India (GOI) Beneficiary: Oil and Natural Gas Commission (ONGC) Amount: US$295.0 million equivalent Lending Terms: Repayment over 20 years, including five years grace, at the standard variable interest rate. Funds will be onlent to ONGC at a rate of at least 15% per annuma repayment over 15 years, including five years' grace. GOI would bear the foreign exchange and interest rate risks. Project Description: The objectives of the Western Gas Development Project are to accelerate the production and utilization of natural gas in India as a replacement for imported petroleum products, thus saving substantial foreign exchange, and helping to overcome energy shortages which constrain economic growth. In particular, the project will: - expand production of the offshore South Bassein gas field from 10 to 20 MMCMD; - support initial development of the Gandhar gas field, which will produce up to 3.5 MMCMD of gas; - eliminate flaring of about 1 MMCMD of associated gas at the offshore Heera oilfield, by linking it by pipeline to Bombay; - appraise the potential of the outlying Tapti and H&Aira fields by seismic surveys for possible future additions to India's gas supply. In addition, the project will encourage optimal planning of gas production and utilization in India, through support for studies of the least-cost investments for field development and transmission infrastructure for the western region, and the uses of gas which yield the greatest economic benefit. Project Benefits: The project investments are expected to result in additional production of 11-12 MMCMD of natural gas, equivalent to about 3.2 million tons of crude oil annually, plus an additional 0.7 million tons per annum of liquid petroleum products (LPG and NGL). This is roughly equivalent to one-third of India's current annual petroleum imports. The net economic benefit to This documenths b atrkd ditbution and may be used by eipints only in th pfonmnce of thei ofic duts. Its contents may not oterwi be dicsed wiout Word Bank authoution.  the country is estimated at US$550 million annually from 1991/2 onwards. The total net present value of the investment is approximately US$2.5 billion. Project Risks: All petroleum investments have certain risks inherent in the process of drilling and producing oil and gas. Even though the major project components comprise development (rather than exploration/appraisal) of new fields, technical risks associated with eventual reservoir performance do exiat and are comparable to any other new field development. Furthermore, poor planning and coordination of the gas market with gas supply would result in underutilization of the infrastructure proposed. While sensitivity analyses indicate that the project remains sound even with delayed gas offtake, substantial benefits may be lost without proper planning. Provision for comprehensive planning studies is thus included in the project. Oil price fluctuations will influence project economics; however, the economic return on the investment will still be over l0X for oil price. as low as US$12 per barrel. Estimated Costs: In US$ Millions Local a/ Foreign Total South Bassein Field Phase II - Offshore 78.5 178.4 256.9 Onshore 74.6 55.3 129.9 Heera-Uran Gas Pipeline 5.5 104.6 110.1 Gandhar Field - Drilling 203.6 247.0 450.6 - Facilities 53.8 8.0 61.8 North Tapti and Hazira Fields - Drilling 29.7 47.0 76.7 - Seismic 1.0 7.0 8.0 Studies, Consulting 0.3 1.0 1.3 Base Cost 447.0 648.3 1,095.3 Physical Contingencies 44.7 64.9 109.5 Price Contingencies 91.9 57.1 149.1 Total Project Cost 583.6 770.3 1,353.9 a/ Including duties and taxes of US$192.1 million.  Financing Plan: In US$ Millions Local Foreign Total IBRD 295.0 295.0 Commercial Borrowings 305.2 305.2 Export and Suppliers Credits 170.1 170.1 ONGC (Equity) 583.6 - 583.6 Total Financing Required 583b 6 770.3 1,353.9 umap. =uu= u:=~us=w Estimated Disbursements: In US$ Millions IBRD Fiscal Year FY88 F89 FY90 FY91 FY92 FY93 Annual 10 90 95 60 35 5 Cumulative 10 100 195 255 290 295 Economic Rate of Return: 281  INDIA WESTERN GAS DEVELOPMENT PROJECT STAFF APPRAISAL REPORT TABLE OF CONTENTS Page No. I. THE ENERGY SECTOR A* The Overview ........................................... 1 B. Primary Energy Production............... ............... 1 C. Energy Consumption .......................... . 3 D. Energy Policy and the Role of Petroleum ................. 3 E. Petroleum Reserves and Production ... ................... 4 F. Petroleum Product Demand ..e ............................ 5 C. Projected Supply/Demand Balances ....................... 6 H. Petroleum Sector Policy .*** .......................... 7 I. Petroleum Pricing 9.................................... 5 II. THE GAS SUBSECTOR A. Introduction ........ . ....... 10 B. Gas Reserves and Production ........................... 11 C. Gas Utilization .......** ............................. 12 D. Potential Total Demand ...* .......................... 13 E. Supply and Demand in the Western Region ....o........... 15 F. Institutional Arrangements ............................ 21 C. Gas Sector Development Planning ....................... 21 H. Gas Pricing .e ..... ................................ 22 I. The Role of the Bank in the Gas Sector ................ 24 III. THE PROJECT A. Background and Project Objectives...................... 27 B. Project Description **.** ............................. 27 C. Project Implementation ................................ 29 D. Project Cost ........ 30 E. Financing Plan and Items for Bank Financing ....... 32 P. Procurement ......****....*.......................*.. 34 G. Disbursements ....*....** ......*..................... 36 H. Ecological Aspects and Safety ...... ................... 37 This report was prepared by Messrs. John Lowe (Sr. Financial Analyst), Hannachi Morsli (Sr. Petroleum Engineer), Peter Pease (Procurement Specialist), William J. Smith (Economist), Arnold Vonck (Petroleum Engineer), Kenneth Crowther and Tom Fitzgerald (Consultants) on the basis of an appraisal mission which visited India in July, 1986. The financial section of the repott was completed by Mr. C.K. Teng (Financial Analyst) supported by Mss. M. Tumaliwan (Consultant) and I. Odulate (Research Assistant).  - ii - Page No. IV. THE BORROWER: ONGC A. Organization and Management: Introduction ............. 38 B. Organization . .................... .................. 39 C. Institutional Aspects * ................................ 3Q D. Financial Aspects: Past Results ....................... 40 E. Operating Performance ................................. 42 F. Financial Projections ................. eeoc........... 43 G. ONGC's Investment Program ............................. 45 H. Financial Analysis of the Project ....... .............. 46 I. Finan:ial Covenants .................... 46 V. ECONOMIC JUSTIFICATION A. Project Benefits .................... 47 B. Project Costs *e .eeee.eee................e.e.eeeee.... 50 C. Economic Analysis ....*...............**........*.... 50 D. Project Risks 5............................ 2 VI. AGREEMENTS With the Government of India .......................... 53 With the Oil and Natural Gas Commission ...... ......... 53 ANNEXES 1.1 Crude Oil and Petroleum Product Balances 1.2 Crude Oil Production by Area 1.3 Natural Gas Production and Use by Region 2.1 Gas Supply - Bombay High and Satellite Fields 2.2 Gas Supply - South Bassein and Satellite Fields 2.3 Gas Supply - Onshore Gujarat 2.4 Identified Gas Demand - Bombay Area 2.5 Identified Gas Demand - Onshore Gujarat 2.6 Identified Gas Demand - Hasira and HBJ 2.7 Western Region Gas Supply/Demand Balances 3.1 Estimated Oil and Gas Reserves - Selected Fields 3.2 Gas Productior and Shrinkage - South Bassein/HBJ Program 3.3 Gas Productio;. and Shrinkage - South Bassein Phase II 3.4 Gas Treatment Complex at Hazira - Mass Balance Diagram 3.5 Production Profile - Heera 3.6 Production Profile - Gandhar 3.7 Technical Notas on Characteristics of Western Region Fields and ONGC Development Plans  - iii - 4.1 ONCC: Typical Project Organization 4.2 Implementation Schedule of Project Components 4.3 Implementation Schedule of the Drilling and Seismic Components 4.4 Detailed Project Cost. Table 4.5 Estimated Schedule of Disbursement 5.1 Management of Oil and Natural Gas Commission 5.2 Schedule of Long-Term Loans Outstanding 5.3 Income Statement 5.4 Production Projections 5.5 Revenue Projections 5.6 Investment Program 5.7 Balance Sheet 5.8 Sources and Uses of Funds 5.9 Financial Analysis Assumptions 5.10 Financial Returns of Projected Components - Before Income Taxes 5.11 Financial Returns of Projected Components - After Income Taxes 6.1 Economic Analysis Assumptions 6.2 Project Economic Analysis - South Bassein Phase II Incremental 6.3 Project Economic Analysis - South Bassein/HBJ Program 6.4 Project Economic Analysis - Heera 6.5 Project Economic Analysis - Gandhar 6.6 Project Economic Analysis - Sensitivity Analysis 7.1 Related Documents in Project File MAPS IBRD No. 19877 - Western Gas Development Project IBRD No. 19878 - Western Gas Development Project - Oil and Natural Gas Sector  I. TRE ENERGY SECTOR A. Overview 1.01 The energy scarcity remains a key constraint to accelerating the rate of India's economic growth. Fuel and power shortages continue to hamper the full utilization of industrial and agricultural production capacities, and oil imports, while significantly reduced, continue to absorb approximately one- third of India's export earnings. 1.02 The growth of the energy sector has been constrained by the slow pace at which energy resources have been developed, due to lim.ited availability of funds for investment and the efficiency with which these are used. The level of efficiency in the major subsectors such as the industrial sector, which provides much of the equipment for energy production, and the transport sector, which provides the vital link between the coal industry - India's major commercial energy supplier -- and its users, also needs to be improved for the country to achieve significant growth in the energy sector. Large investments are required, in addition to greater efficiency in the use of both new and existing investments in the energy sector in order to accelerate the pace of development of energy resources. 1.03 Berause of the difficulties of rapidly mobilizing substantial investment resources for the energy sector -- as well as the long gestation period required for implementing energy projects, particularly hydro projects -- it is important that the management of energy demand be improved, correct energy substitution choices on the part of users be encouraged, and insti- tutional capabilities and linkages in the energy sector be strengthened. improvements in these areas could contribute significantly to reductions in production costs and consumption of energy per unit of production by principal energy users. 1.04 Although the Government of India (OOI) has accorded high priority to development of energy resources, past efforts to reduce the rate of growth of energy consumption have had only a marginal impact. During 1979/80- 1986/87, the growth of consumption of all commercial forms of energy averaged about 6X annually, compared to an average GDP growth rate of 5X per year during the same period. The elasticity of energy consumption with respect to income still remains, at 1.2, relatively hMgh for a resource-scarce country such as India. B. Primary Energy Production 1.05 In India, commercial primary energy, which consists of coal, hydro and nuclear power, and petroleum, accounts for slightly less than one-half of total primary energy supply. The balance comes from non-commercial sources, mostly firewood, agricultural and animal wastes. The supply of commercial energy has been growing faster than that of non-commercial energy. By 1985/86 production of primary commercial energy hp-d reached about 120 million tons of oil equivalent per year. 1.06 Coal is, and will continue to be, India's most abundant commercial energy resource. It meets about 50% of the country's commercial energy  - 2 - requirements. Total resources are estimated et over 112 billion tons, approximately half of which is economically recoverable under present conditions. At current rates of consumption this is equivalent to about 250 years total primary commercial energy. Most of India's coal is of low to medium quality, and there are substantial bottlenecks in coal transportation, with the result that in many areas of the country coal is a relatively expensive energy resource. 1.07 Power. As of 1985 total installed power generating capacity was approximately 42,000 MW, of which 652 was conventional thermal, 33% hydro, and 2% nuclear. India has extensive hydro potential. The GOI accords high priority to the development of hydropawer, but because hydroelectric projects require long lead times and large capital commitments for tiieir implementation, only a small share of India's hydro potential has been developed now. Consequently most recent additions to power generating capacity have been from thermal power plants. The share of thermal has increased steadily over the last twenty years. At present, it accounts for approximately two-thirds of generating capacity. 1.08 India's economic growth is highly dependent upon the performance of the power sector. At LIdia's stage of growth, large gains in productivity can result from increased use of power. Present per-capita production of electricity is about 200 kilowatt hours which compares, for example, with about 400 kilowatt hours per capita in the Philippines, where CNP per capita is about three times that of India. Conversely, power shortages have a serious adverse impact throughout the economy. During the 1950's and 1960's power generation has kept pace with demand. Since 1970, however, supply has fallen short of demand. This has resulted from delays in the commissioning of new projects, operating and maintenance problems, and budget constraints which have limited investment in the sector. These problems have been aggravated by inefficient operations and distribution, unreliable coal supplies due to transport problems, and the declining quality of coal. Recognizing these problems, the GOI has undertaken a program of remedial measures. Although power plant utilization rates increased significantly recently, the supply of power is still expected to remain inadequate, especially in areas where coal is not readily available. 1.09 Petroleum. In the 1970's India discovered the giant Bombay High offshore oil field. As a result, the country is presently able to produce about 75% of its petroleum requirements. The results of stepped up exploration efforts and recent discoveries point to existence of considerable pltroleum resources. Nevertheless, India is not self-sufficient, and the shortfall in the country's commercial energy requirements are met primarily through imports of crude and petroleum products. 1.10 It is estimated that only one-fourth of India's likely commercially recoverable petroleum reserves have been proven, with undiscovered potential heavily weighted towards gas. Systematic petroleum exploration has only been undertaken recently, and large parts of India's potentially hydrocarbon- bearing basias have yet to be explored. It is expected that reserves yet unproved will likely be in the more difficult geological areas, and more likely will consist of gas than oil. Present recoverable reserves of oil are approximately 500 million metric tons - enough to last 15 years at current rates of production. Output from the Bombay High oil field, which accounts  - 3 - for 701 of domestic oil production, is reachiug a plateau, and unless new resources are identified, developed, and brought onstream, domestic osl production will decline as Bombay High production declines over the next decade. C. Energy Consumption 1.11 In India the household sector accounts for a relatively small share of commercial energy c o Mton (7X of coalt 19X of petroleum and 101 of electricity). However, consumption of non-commercial energy in this sector is high, particularly in the rural areas where the use of electricity and kerosene is still limited mostly to lighting. Although the substitution of' commercial energy for non-commercial energy will continue, non-commercial energy will likely remain the most important energy resource for many rural households. 1.12 In $Uiculture, energy needs are met mostly by animal power or by the use of liquid fuels, mainly diesel oil. Co_mercial energy consumption in agriculture accounts for only about 62 of total co_mercial energy use, but it has grown rapidly during the past two decades, reflecting the efforts to modernize this sector. 1.13 The industrial sector consumes about 351 of total commercial energy resources and almost 602 of all energy (including non-commercial fuels). It is by far the largest user of coal and electricity. In 1982/83, Indian industry accounted for slightly more than 80% of coal consumption, 222 of oil consumption, 472 of natural gas consumption and 62Z of electricity consump- tion. Over the past twenty years the energy intensity (energy cost per unit of value added) of industry has increased significantly. However, the growth of energy intensity in industry is expected to slow down as a result of the introduction of more energy-efficient technologies, the more efficient use of existing capacities, and improvements in the design of plants and machinery. 1.14 The transport sector is the largest user of petroleum products and the second largest user of coal. Over the past twenty years the structure of energy demand by this sector has changed considerably as a result of the rapid growth of road transport and the substitution of diesel electric for steam locomotives. Current energy demand projections for the transport sector point to a continuing decline in coal consumption as road transport increases and railways continue to shift to more efficient diesel electric locomotives, thereby contributing to a growing demand for petroleum products. D. Energy Policy and the Role of Petroleum 1.15 Significant increases in energy demand in India are forecast over the next twenty years as population grows and as the economy becomes more industrialized. Demand is expected to grow most rapidly in the household and industrial sectors, and the demand for electricity and petroleum is expected to grow more quickly than demand for coal. The country's energy requirements will far outstrip domestic supply for the foreseeable future, although this overall shortfall can be reduced by increases in domestic energy production and to a lesser extent by improvements in conservation and energy efficiency. GOI's strategy in dealing with this situation is:  - 4 - (a) To increase power generating capacity as rapidly as possible, especially hydro and nuclearl (b) To encourage the use of coal and accelerate the development of gas resources; (c) To reduce dependence on liquid petroleum products through substitution; and (d) To encourage conservation, energy efficiency and fuel substitution through pricing, allocation, and conservation programs. 1.16 This strategy is reasonable, given: (i) the persistent shortfall in energy supply - especially power and coal supplies - which continues to hamper economic growth and more rapid industrial development; (ii) the small likelihood of any major reduction in the growth of energy demand in the near future; (iii) fiscal constraints which limit COI's capability to undertake all of the investments required in the energy sector; and (iv) recent changes in petroleum prices and its impact on the oil industry. Even if these constraints can be overcome, a substantial shortfall in energy supply is still expected for the foreseeable future, most of which will have to be met from imports of crude oil and petroleum products. The petroleum subsector will, therefore, continue to play a crucial role in India's energy strategy for the remainder of the century. 1.17 India's effort to adjust to the shocks of the two major oil price increases of the 1970's has been largely successful; however, there is a need to prepare for potentially serious shortfalls again in the 1990's. In order to avoid a recurrence of the situation in which petroleum shortages could constrain economic growth and/or put an unacceptable burden on the balance of payments, the GOI has: (a) Almost doubled its investment program in oil and gas exploration and development; (b) Expanded the role of natural gas as a replacement for liquid hydrocarbons; and (c) Encouraged the involvement of private contracting and service firms in the petroleum sector, and solicited the interest of international oil companies in the exploration process. E. Petroleum Reserves and Production 1.18 India contains some 1.7 million sq km of sedimentary basins containing projected reserves of about 15 billion metric tons of oil and oil equivalent of gas in place. This corresponds to some 4-5 billion metric tons or tons equivalent (30-35 billion barrels) of commercially recoverable reserves. About 70% of the recoverable reserves are expected to be gas. Up to now, only about 700 million metric tons (mt) of oil and 650 million mt oil equivalent of gas reserves (800 billion cubic meters of gas) have been proven - or slightly more than one-quarter of the likely commercially recoverable reserves.  - 5 - 1.19 Oil production has increased dramatically over the last ten years, principally as a result of development of the Bombay High field. Production from this field contributes over 70X of domestic production, the balance being produced in about equal proportions from onshore areas in Gujarat and Assam (Table 1.1). Table 1.1 Crude Oil Production and Reserves by Area (millon at) Estimated Remaining 1985/88 Rsserve/ Production Recoverable Production Ratio 1970/71 1975/76 1960/81 1986/87 Reserves (1987) (Years) Bombay High - - 5.0 20.6 330 16 Assam 3.4 4.3 1.7 5.2 40 6 GuJarat 3.5 4.1 3.8 4.6 211 45 Total 6.9 8.4 10.5 30.4 561 19 Soqrce: G01, ONGC, Bank staff estimates. 1.20 Oil production from Bombay High has now reached a plateau and is expected to start to decline after 1992. Production from the other regions is being sustained by improved recovery levels and augmented by marginal discoveries of new reserves. F. Petroleum Product Demand 1.21 Domestic production of petroleum has never been sufficient to meet demand in India. However, due to the low level of petroleum intensity in the economy, this shortfall did not become a major problem until the 1960's. At that time increasing industrialization and population growth resulted in increasingly large oil imports. By 1980/81 over 16 million tonnes (652 of requirements) were imported. These relationships for selected years are summarised in Table 1.2 below (Annex 1.1).  - 6 - Table 1.2 Production, Consumption and Import of Oil (Million metric tons per annum) 1970171 1975/76 1984/81 1986/8? Petroleum Product Consumption 17.9 22.5 30.9 43.4 Domestic Crude Oil Production 6.08) 8.5) (10.5) (30.4) Net Crude plus Products Imports 12.5 15.7 23.6 16.1 Import Dependency (S) 69 71 77 37 a/ Figures do not add because of process losses, changes in stocks, and ro-exports. Source: GO0 1.22 In the 1970's India met almost all of its requirements for petroleum products by refining imported crude. Since then demand for refined products has grown 5-6X per year. This additional demand has been met by refining increased amounts of domestic crude (principally from Bombay High) and from imports. Total refinery capacity has kept approximate pace with demand of about 40 million tons per year (mtpy). However, the composition of refinery output does not match the composition of demand. As a result, there is a shortage of middle distillates, particularly kerosene and diesel, which is met through imports. G. Projected Supply/Demand Balances 1.23 Petroleum products demand in India will continue to grow, both because current consumption is low, and because urban and industrial growth results in increased intensity of petroleum use. Even with improvements in demand management and increased energy efficiency, consumption is expected to grow at over 5X p.a. for the rest of the century, resulting in demand doubling (to about 80 mtpy) by the year 2000. It is estimated that the production of petroleum may increase to about 40 mtpy of crude by then (Annex 1.2). This estimate is based on the assumption that production from the Bombay High oilfield plateaus and then declines through the 1990's, and that new production will, in general, be from smaller, more marginal new fields, and from higher recovery rates of established fields. 1.24 Current plans of ONGC and 001 aim for an increase of production from existing fields to 35 mtpy by 1990 (Annex 1.2). They are based on the assumption that the pattern of small to medium discoveries continues at the same rate as during the Sixth Plan, thus adding some 150 million tonnes of commercially recoverable reserves in each five-year period. This would then allow increases in production at the same rate as in the last two plan periods (about 5 mtpy every five years) up until 1995, at which point the decline from existing fields (especially the Bombay High oilfield) starts to take effect, and production declines to the 35 mtpy level, having peaked at 40 mtpy in the 1990's.  1.25 Thus the petroleum supply constraint will likely continue through the remainder of the century, and India will need to increase its imports of petroleum. The Government is according high priority to identifying new petroleum resources for the 1990's and beyond. One potentially significant option is the substitution of natural gas for liquid petroleum products, and although there are technical and economic limits to substitution possibilities, the utilization of gas in appropriate markets offers the prospect of substantially reducing India's prospective shortfall in petroleum resources. The GOI, as a matter of policy, is supporting the substitution of gas for petroleum to the greatest extent feasible. The current project is designed to support these initiatives. H. Petroleum Sector Policy 1.26 Exploration and Production. There is substantial scope for increasing the domestic production of oil and gas in India, both by discovering new resources and by increasing recovery from existing oil fields by the use of enhanced production techniques. Many areas with petroleum potential are still under-explored and only a fraction of the country's projected reserves have been found. Bank staff estimates that perhaps some 50% of expected oil and 75-80% of expected gas remains to be found. The pace and scope of exploration activity have been uneven, and there have been limited important finds since the discovery of the Bombay High oilfield in 1974. The GOI has recently attached high priority to an expanded exploration effort by the two national oil companies, ONGC and OIL. Almost US$3 billion equivalent has been allocated for exploration purposes alone over the current Five-Year Plan period. 1.27 The finding of new hydrocarbon resources is of utmost importance to India, and the overall prospectivity of the country justifies a continuing and substantive exploration effort. The GOI's exploration strategy involves a two-pronged approach: first, a continuing exploration effort by the two national oil companies, ONGC and OIL; second, involving the international oil industry in the more difficult, high risk offshore areas to complement this national exploration effort. In regard to the exploration investment strategy undertaken by the national oil companies, GOI recognizes that the investment strategy has to be as cost effective as possible and thus should be made on the basis of detailed geological information from seismic surveys, in order to avoid premature drilling and needless dry holes. Specific Bank involvement in making these programs increasingly cost-effective is being carried out in the context of the Krishna-Godavari project and in the recently approved Oil India project. In parallel, international oil companies were invited in May 1986 to participate in a Third Round of exploration acreage offerings in which GOI offered 27 exploration blocks on a sole risk basis. The response to this offering in a difficult external climate, was encouraging. Twelve offers by seven different companies or consortia covering both the western and eastern offshore areas have been received. Four initial contracts were signed at the end of 1987, with exploration activity expected to start soon thereafter. 1.28 The Role of Gas. India has substantial untapped reserves of natural gas. It is estimated that by the end of the century gas could replace up to 17 mtpy of petroleum products (about one-half of current consumption). To date, however, there have been substantial delays in developing the gas market and coordinating it with field and infrastructure development. As a result  - 8 - gas remains underutilized. This situ4\tion is now changing as GOI establishes a more concrete gas strategy. However, there are still problems of planning and coordination, which this project seeks in part to overcome. The role of gas and associated policy issues are described in more detail in Chapter II. 1.29 Public and Private Investment. As the petroleum sector has grown over the last decade, commitments of budgetary resources have increased commensurately. Initially, most of these resources have been made available to ONGC as budgetary transfers from the Government. During the past seven years, ONGC has relied on internally generated funds supplemented by direct borrow:ngs. Under the recently completed Sixth Plan, the petroleum sector was origin-illy allocated an equivalent of approximately US$5 billion of resources. This was increased to US$11 billion at a mid-Plan review, as it became clear that accelerated expansion of the Bombay High oilfield would yield high returns. Actual expenditure is estimated at US$9 billion equivalent, as a result of some delays in a number of large projects. Despite the large investments, the sector remained a net contributor to public finances, paying approximately US$15 billion equivalent in taxes and dutie