China - Oilfield and Petroleum Projects

Document of The World Bank FOR OFICAL USE ONLY Report No. 13694 PERFORMANCE AUDIT REPORT CHINA DAQING OILFIELD-GAOTAIZI RESERVOIR DEVELOPMENT PROJECT (LOAN 2231-CHA) ZHONGYUAN-WENLIU PETROLEUM PROJECT (LOAN 2252-CHA) AND KARAMAY PETROLEUM PROJECT (LOAN 2426-CHA) NOVEMBER 14, 1994 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (annual averages) Currencv UJnit = Yuan (Y) US$1.00 = Y5.8 ABBREVIATIONS AND ACRONYMS CNOOC - China National Offshore Oil Corporation CNPC - China National Petroleum Corporation CNTIC - China National Technical Import Corporation DPAB - Daqing Petroleum Administration Bureau ERR - Economic Rate of Return KOC - Karamay Oil Company GOC - Government of China MIS - The Management Information System MOPI - The Ministry of Petroleum Industries OECD - Organization for Economic Cooperation and Development PCR - The Project Completion Report SPCMI - State Planning Commission Machiniery and Inspectioni Wing TOR - Terms of Reference ZPEB - Zhongyuan Petroleum Exploration Bureau FISCAL YEAR January 1, - December 31  FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation November 14, 1994 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on China Daqing Oilfield-Gaotaizi Reservoir Development Project (Loan-2231-CHA) Zhongyuan-Wenliu Petroleum Project (Loan 2252-CHA) Karamav Petroleum Proiect (Loan 2426-CHA) Attached is the Performance Audit Report on China - Daqing Oilfield-Gaotaizi Reservoir Development Project (Loan 2231-CHA), Zhongyuan-Wenliu Petroleum Project (Loan 2252-CHA) and Karamay Petroleum Project (Loan 2426-CHA) prepared by the Operations Evaluation Department. The objectives of these projects were to enhance exploration success and petroleum production levels, through the introduction of modern oilfield technology and through training in the use of these advanced technologies. Although there were significant delays in implementation, due primarily to the complex institutional arrangements required for foreign procurement in China at that time, the projects all met their major objectives. In particular, sophisticated technologies were effectively transferred. Both production levels and reserves increased substantially under all projects. Safety practices studies, drilling and completion studies and modern technical training facilities for oilfield workers and technicians were also introduced. The outcome of all three projects is rated as highly satisfactory, their sustainability as likely, and their institutional impact as substantial. This document has a restricted distribution and may be used by recipients onLy in the performance of I their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   FOR OFFICIAL USE ONLY PERFORMANCE AUDIT REPORT CHINA DAQING OILFIELD-GAOTAIZI RESERVOIR DEVELOPMENT PROJECT (LOAN 2231-CHA) ZHONGYUAN-WENLIU PETROLEUM PROJECT (LOAN 2252-CHA) AND KARAMAY PETROLEUM PROJECT (LOAN 2426-CHA) TABLE OF CONTENTS Page No. PREFACE ................................................. i BASIC DATA SHEETS .ii EVALUATION SUMMARY .xi The Daqing Project .xi The Zhongyuan Project .xii The Karamay Project .xiii Common Findings and Lessons .xv Conclusions .xviii DAQING OILFIELD-GAOTAIZI RESERVOIR DEVELOPMENT PROJECT I 1. BACKGROUND .I 2. PROJECT OBJECTIVES . 2 3. PROJECT IMPLEMENTATION AND RESULTS. 2 Exploration. 3 The Prototype Production Station. 3 Studies. 3 Training .5 This report was prepared by Richard L. Bemey, Principal Evaluation Officer, with inputs from Fernando Zuniga-Rivero, Petroleum Engineering Consultant and secretarial services by Loma Sibblies. This document has a esicted distribution and may be used by recipients only in the peormanc of ther official duties. Its contents may not otherwise be disclosed without World Bank authrzton.  TABLE OF CONTENTS (Cont'd.) Page No. 4. PROJECT ISSUES . ......................................... 5 Delays in Project Implementation . ............................. 5 The Prototype Petroleum Production Station ...................... 6 Choice of Technology ...................................... 6 5. PROJECT OUTCOME AND SUSTAINABILUTY. .................. 8 ZHONGYUAN-WENLIU PETROLEUM PROJECT . ................... 9 1. BACKGROUND ............................................ 9 2. PROJECT OBJECTIVES . .................................... 9 3. PROJECT IMPLEMENTATION AND RESULTS ................... 10 4. PROJECT ISSUES . ......................................... 11 Findings and Lessons Learned from PCR ......................... 11 Delay in Project Implementation ............................... 11 The Reservoir Study ........................................ 14 The Management Information System (MIS) Study .................. 16 5. PROJECT OUTCOME AND SUSTAINABILITY . .................. 16 KARAMAY PETROLEUM PROJECT .. 17 1. BACKGROUND ............................................ 17 2. PROJECT OBJECTIVES . .................................... 17 3. PROJECT IMPLEMENTATION AND RESULTS . ................. 18 Light Oil .............................................. 18 Heavy Oil at Karamay ...................................... 18 Heavy Oi! at Liaohe ........................................ 19 Training Center ............. .............................. 19 Studies . ................................................ 19  TABLE OF CONTENTS (Cont'd.) Page No. 4 ISSUES. ............ ................................... 20 Findings and Lessons of PCR Report ............................ 20 Procurement ............................................. 21 The Shift to Heavy Oil Development ............................ 21 Training ................................................ 22 Technical Studies .................... . ...................... 23 Lessons Learned from Implementation of Studies ................... 24 5. PROJECT OUTCOME AND SUSTAINABELITY . .................. 25 CONCLUSIONS FOR ALL THREE DEVELOPMENT PROJECTS. ...... 26 Bank Lending for Oil Development in China ...................... 27 Annex 1: Comments from China National Petroleum Corporation .... ........ 28   PERFORMANCE AUDIT REPORT CHINA DAQING OILFIELD-GAOTAIZI RESERVOIR DEVELOPMENT PROJECT (LOAN 2231-CHA) ZHONGYUAN-WENLIU PETROLEUM PROJECT (LOAN 2252-CHA) AND KARAMAY PETROLEUM PROJECT (LOAN 2426-CHA) PREFACE This is a Performance Audit Report (PAR) for the Daqing Oilfield-Gaotaizi Reservoir Development Project involving a Bank Loan of US$162.4 million, US$161.9 of which was disbursed; the Zhongyuan-Wenliu Petroleum Project, involving a loan of US$100.8 million, US$96.8 of which was disbursed; and the Karamay Petroleum Project, involving a loan of US$100.3 million, US$89.5 of which was disbursed. The main objective of the three projects was to transfer modem oilfield technology to China and to increase petroleum production at the three fields. Project Completion Reports were issued on May 21, 1991, December 10, 1992, and June 29, 1992, respectively. The PAR was written in the Operations Evaluation Department (OED). To prepare it, OED reviewed the Presidents' Reports, Staff Appraisal Reports, legal documents, transcript of the Board Proceedings, Bank files, and held discussions with Bank staff associated with the project. An OED mission visited China in October 1993, where it held discussions with Govemment officials, officials of the China National Petroleum Company (CNPC), China National Offshore Oil Corporation (CNOOC), and the management of the Daqing Petroleum Administration Bureau (DPAB), Zhongyuan Petroleum Exploration Bureau (ZPEB), and the Karamay Oil Company (KOC). The effective and pleasant cooperation and assistance of these Chinese authorities, and particularly of CNPC, is gratefully acknowledged. The PCRs, which were of acceptable quality, concluded that the implementation of all three projects was successful and that the results were all satisfactory. This audit report supplements the PCRs. It makes recommendations on ways that similar projects could be implemented with less delays in the future, and highlights the practices used for the successful transfer of technology and recommends that these practices be used in similar circumstances elsewhere. Following standard OED procedures, this draft PAR was sent to the Borrower for comment. Comments received are attached as an annex to the PAR.   i. PERFORMANCE AUDIT REPORT CHINA DAQING OILF[EDI-GAOTAIZI RESERVOIR DEVELOPMENT PROJECT (LOAN 2231-CHA) BASIC DATA SHEET KEY PROJECT DATA Apraisal Expectation Actual Total Project Cost (US$ million) 674.3 332.0 Loan Amount (US$ million) 162.4 161.9 Economic Rate of Return 91 % *As the net cash flow was positive from the first year of project implementation, the ERR (on an annualized basis) was an infinite rate of return. See p. 19 of PCR. CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS (USS million) Bank FY 1298 124 198S 1986 1287 1288 .12 1990 12m Appraisal Estimate 30.0 120.0 150.0 162.4 162.4 162.4 162.4 162.4 162.4 Acual - 7.0 57.2 97.5 127.5 138.3 146.2 160.2 161.9 Actual/Appraisal, % - 5.8 38.1 60.0 78.5 85.2 90.0 98.7 99.7 PROJEC TIMETABL Original Actual Identification Mission 9/81 Appraisal Mission 2-3/82 Negotiations 12/82 Board Approval 1/25/83 Loan Signature 3/8/83 Loan Effectiveness 9/8/83 Closing Date 6/30/86 6/30/90 Date of Final Disbursement 8/8/90 Loan Completion 10/31/90  iii (Staff Weeks) Through Appraisal 48.1 Through Board Approval 147.2 Supervision 148.9 Total 344.2 MISSION DATA Stage Date Number of SW in Specialties Performance (mo/yr) Persons RI Reesented La Ratng Zk Through appraisal Identification 9/81 5 3 E, FA, PE Appraisal 2/82 7 4 E, FA, G, PE Appraisal through board approval Post Appraisal 5/82 7 3 PE, PS Supervision 1* 9/83 1 3 PS 2* 3/84 2 4 E,PS 3 4/84 4 2 FA, PE, G 2 4* 10/84 1 3 PS 5 12/84 4 3 FA, G, PE,PS 6* 5/85 1 4 PS 7* 9/85 1 2.5 PS 8* 4/86 1 3 PS 9 6/86 3 1 FA,PE,G I 10* 10/86 1 1 PS 11 2/87 3 2 FA,PE,G 1 12* 3/88 1 1 PS 13 6/88 3 1 FA,PE,PS 14 7/89 2 1 PE,PS I * Procurement supervision in combination with other projects. /A: E: Economist L: 1: No significant problem PE: Petroleum Engineer 2: Moderate Problem FA: Financial Analyst 3: Major Problem PS: Procurement Specialist 4: Major problem not adequately addressed G: Geologist  iv RELAT'ED BANK PROJECTS Purpse Year of Cths(ommenlts AppDroval Zhongyuan Wenliu Petroleum Petroleum 1983 Satisfactory Completion date: Project (Ln. 2252-CHA) exploration/ Original: 12131/86 development, Actual: 12/31/90 TA and training. Karamay Petroleum Petroleum 1984 Satisfactory Completion date: Project (Ln: 2426-CHA) exploration, Original: 3/31/89 heavy oil Actual: 3/31/91 recovery, TA and training. Weiyuan Gas Field Gas field 1985 Satisfactory Completion date: Technical Assistance rehabilitation Original: 6/30/90 Project (Ln: 2580-CHA) TA and training. Actual: 6/30/92 Liaodong Bay Petroleum Gas field 1986 Completed Completion date: Project (Ln: 2708-CHA) appraisal, TA Satisfactorily Original 12/31/89 and training Actual: 12131/89 Sichuan Gas Development Support of 1994 Completion date: and Conservation Project sector restruc- Original: 2001. (Ln: 3716-CHA) turing, pricing, Loan approved: 3/94 rationalization, increasing gas production & conservation.  v PERFORMANCE AUDIT REPORT CHINA ZHONGYUAN-WENLIU PETROLEUM PROJECT (LOAN 2252-CHA) BASIC DATA SHEET KEY PROJECT DATA A&Draisal Expectation Actual Total Project Cost (USS million) 499.8 427.0 Loan Amount (USS million) 100.8 96.8 Economic Rate of Return 74% 49% CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS FY 1984 1985 1986 1987 1988 1989 1990 1991 Appraisal Estimate (USS million) 27.0 85.0 100.8 Actual (USS million) 0.8 18.4 35.7 58.3 63.6 81.6 85.7 96.6 Actual/Appraisal, % 3 22 35 58 63 80 85 96 PROJECT TIMETABLE Original Actual Identification Mission 9/81 Preappraisal Mission 9/82 Loan Negotiations 2/83 Board Approval 3/29/83 Loan Signature 4/15/83 Loan Effectiveness 8/9/83 Closing Date 12/31/86 12/31/90 Date of Final Disbursement 5/3/91  vi STAFF INPUTS (Staff Weeks) Actual Through Appraisal 116.5 Appraisal Through Board Approval 16.9 Supervision 183.1 Total 317.5 MISSION DATA Stage of Date Number of SW in Specialties Performance Proiect (mo/vr) persons field reRresented /a Status /b Through Appraisal 09/81 5 20 PE, PS, FA, G, E Identification Appraisal 02/82 6 24 PE, G, FA, E, two C Appraisal through Board Approval 05/82 3 9 E, FA, PE Post Approval 09/83 3 9 E, FA, PE Supervision 1 09/83 2 5 PA, PE 1 2 03/84 4 24 G, GP, FA, PE 2 3 09/84 3 6 G, FA, PE 2 4 05/85 4 8 G, FA, PE, PS 2 5 12/85 3 6 G, FA, PE 2 6 09/86 3 10 G, GP, PE 2 7 02/87 3 3 G, PS, PE 2 8 10/87 3 6 PS, FA, PE 2 9 03/89 3 3 PS, PE, G 2 10 05/91 4 3 PS, PE, FA, C /a: PE: Petroleum Engineer /bL 1: No significant problem G: Geologist 2: Moderate Problem C: consultants 3: Major Problem GP: Geophysicist 4: Major problem not adequately addressed PS: Procurement Specialist FA: Financial Analyst  vii RELATED BANK PROJECTS Year of Sau Comments Pu=pse A=royal Daqing Oilfield-Gaotaizi Reservoir 1983 Satisfactory Completion date: Resorvoir Development Development Original:6/30/86 Project (La: 2231-CHA) TA and trining. Actual: 6/30/90 Karamay Petroleum Petroleum 1984 Satisfactory Completion date: Project (L: 2426-CHA) exploation, Original: 3/31/89 heavy oil Actua: 3/31/91 recovery, TA and tmaining. Weiyuan Gas Field Gas field 1985 Satisfactory Completion date: Technical Assistance rehabilitation Original: 6/30/90 Project (La: 2580-CHA) TA and training. Actual: 6/30/92 Libaong Bay Petroleum Gas field 1986 Completed Completion date: Prject (La: 2708-CHA) appraisal, TA Satisfactorily Original: 12131/89 and training. Acual: 12131/89 Sickxun Gas Developmet Support of 1994 Completion dae: n Conevation Projct sector restruc- Original: 2001. (La: 3716-CHA) turing, pricing Loan approved: 3/94 rationaliution, increasing gas production and conversation  viii PERFORMANCE AUDIT REPORT CHINA KARAMAY PETROLEUM PROJECT (LOAN 2426-CHA) BASIC DATA SHEET KEY PROJECT DATA Appraisal Expectation Actual Total Project Cost (US$ million) 753.5 964.85 Loan Amount (US$ million) 100.3 89.5 Economic Rate of Return Not Calculated 31% CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS Bank FY 1985 1986 1987 1988 1989 1990 121. Appraisal Estimate (US$ million) 8.0 40.0 94.0 100.3 Actual (US$ million) 4.3 29.1 40.7 65.3 77.9 86.1 89.5 Actual/Appraisal, % 53.8 72.8 43.3 65.1 77.9 85.8 89.2 PROJECT TIMETABLE Original Actual Identification Mission 5/2/83 Appraisal Mission 9/15/83 Negotiations 4/16/84 Board Approval 5/29/84 Loan Signature 6/25/84 Loan Effectiveness 9/25/84 Closing Date 3/31/89 3/31/91 Date of Final Disbursement 7/25/91  ix STAFF NPITTS (Staff Weeks) Through Appraisal 43 Through Board Approval 64 Supervision 154 Total 261 MISSION DATA Stage of Date Number of SW in Specialties Project (mo/yr) persons field reRresented Through Appraisal Identification 5/83 7 4 E, PE, G, FA Appraisal 9/83 6 3 PE, G, FA Appraisal through Board Approval 5/84 Post Approval Supervision 1 7/84 2 1 PE, G 2 10-11/84 5 2 PS, PE, PA 3* 10/84 1 3 PS 4* 12/84 1 2 PS 5* 5/85 1 4 PS 6 5/85 5 1 G, FA,PE, PS 7* 9/85 1 3 PS 8 11/85 3 3 PS, FA, G 9 3-4/86 1 4 PS 10 8-9/86 5 2 G, FA, PS PE, FA 11 2/87 4 1 G, PE, PS FA 12 10/87 3 2 PS, FA, PE 13* 3/89 3 1 PS, G, PE * Procurement supervision in combination with other projects, but only SW which were spent for supervision of Karamay Petroleum Project have been counted. E: Economist FA: Financial Analyst PS: Procurement G: Geologist PE: Petroleun Engineer  x RELATED BANK PROJECTS Purpose Year of Status Comments Approval Zhongyuan Wenliu Petroleum Petroleum 1983 Satisfactory Completion date: Project (Ln. 2252-CHA) exploration/ Original: 12/31/86 development, Actual: 12/31/90 TA and training. Daqing Oilfield-Gaotaizi Reservoir 1983 Satisfactorv Completion date: Reservoir Development Development. Original: 6/30/86 Project (Ln: 2231-CHA) TA and training. Actual: 6/30/90 Weiyuan Gas Field Gas field 1985 Satisfactory Completion date: Technical Assistance rehabilitation Original: 6/30/90 Project (Ln: 2580-CHA) TA and training. Actual: 6/30/92 Liaodong Bay Petroleum Gas field 1986 Completed Completion date: Project (Ln: 2708-CHA) appraisal, TA Satisfactorily Original: 12/31/89 and training. Actual: 12/31/89 Sichuan Gas Development Support of sector 1994 Completion date: and Conservation Project restructuring, pricing Original: 2001. (Ln: 3716-CHA) rationalization, Loan approved increasing gas 3/94 production and conservation.   xi PERFORMANCE AUDIT REPORT CHINA DAQING OILFIELD-GAOTAIZI RESERVOIR DEVELOPMENT PROJECT (LOAN 2231-CHA) ZHONGYUAN-WENLIU PETROLEUM PROJECT (LOAN 2252-CHA) AND KARAMAY PETROLEUM PROJECT (LOAN 2426-CHA) EVALUATION SUMMARY INTRODUCTION 1. China's petroleum production increased off-setting the anticipated decline in domestic from 10 million tons per year in 1960 to nearly oil production; second, to provide a vehicle for 110 million tons in 1980, but declined during the introduction of modem technology through 1981-1982. There had been no new major the financing of modem equipment and the discoveries in the 1970's and there was little technical assistance in optimum utilization of likelihood that future large discoveries could this equipment; and third, to upgrade the augment production during the 1980s. Offshore operating, technical, and managerial skills of exploration, with its high risks and specialized China's oil industry personnel. Three regions requirements, had been contracted out to were identified as being of prime importance to multinational oil companies. The Ministry of MOPI: Daqing, Zhongyuan and Karamay. Over Petroleum Industries (MOPI) came to the the three-year period, 1981-1984, the Bank conclusion that in the short and medium term, identified, and subsequently financed, a project increased output would have to be achieved in each of these areas. primarily through expanded production in and around existing oilfields, and this could only be THE DAQING PROJECT accomplished through the introduction of modem production and exploration technology. 3. The Daqing Oilfield project was the It was within this framework that the first Bank operation in the petroleum sector in Government of China (GOC) approached the China. Daqing was the largest petroleum field Bank for assistance in rehabilitating and in China, where a successful rehabilitation modernizing China's petroleum sector. program would have an important impact on China's aggregate petroleum output. 2. The Bank's petroleum sector lending in China had three basic objectives: First, to 4. The broad objectives of the Daqing improve the development of the known Oilfield Project were: (i) to increase oil hydrocarbon-bearing structures, thereby partially production through the introduction of modem  xii equipment and technology; (ii) to establish a the oilfield region for skilled workers and for training center for skilled workers and another engineers. The program has been extremely for engineers and technical staff; (iii) to successful, with more than 10,000 engineers increase reserves through the support of an and skilled workers already having completed exploration program using modem seismic data various three-month to one-year courses. gathering and processing equipment. Outcome and Sustainability Implementation and Results 9. The Audit finds that the Daqing project 5. The project was executed by the outcome was highly satisfactory, as all its major Daqing Petroleum Administration Bureau objectives were met. Its institutional (DPAB). Implementation started slowly, but development impact was substantial. The completion of most of the physical components transfer of technology that took place during the was delayed by only one year. Studies project, appears to be fully sustainable. The encountered delays from two to seven years, Audit is in full agreement with the PCR that the and training over four years. potential economic benefits from continuing the field development of the Gaotaizi reservoir is 6. The project was highly successful in sustainable. Output from the field is expected introducing modem production and exploration to be greatly increased as a result of the technology, and resulted in substantially enormously positive results of the Enhanced Oil increased oil production and oil reserves. Both Recovery Study. All covenants were complied modem equipment and technology assistance with. were important in this process. As a result of the recommendations made in the reservoir THE ZHONGYUAN PROJECT engineering, well drilling and well completion studies implemented under the project, 10. The Zhongyuan project was the second cumulative production in 1989 was 40% higher Bank project in support of the Modernization of than appraisal estimates. Improved exploration the Chinese petroleum sector. Modem techniques resulted in an increase in proven technology was critical in the Zhongyuan reserves. The expanded size of the oilfield oilfields because the reservoirs were quite deep, resulted in a 50% increase in proven reserves with high pressure gas zones, which made and a greatly expanded development program. drilling very difficult. Its geology was quite DPAB also extended its exploration efforts into complex, and the primitive seismic equipment areas where its old equipment could not have being used made the identification of optimum been used, and increased its ratio of successful drilling locations problematic. wells from 32% to 48%. 11. The broad project objectives of the 7. Five studies related to the transfer of Zhongyuan project were: (i) to increase oil and oilfield technology were implemented under the gas production and reserves in the project area; project. The Reservoir Engineering Study, (ii) to enhance operational efficiency and Drilling and Completion Practices Study and strengthen ZPEB's institutional capabilities; and Safety Study formed the core of the program (iii) to extract LPG from the associated natural for transfer of technology outside the gas which was being flared. technology embodied in equipment purchases. Implementation and Results 8. A large part of the training was accomplished through the creation, for the first 12. The project met with substantial delays time, of formal technical training centers within in all components, with the exception of the  xi,ii drilling of explorati'on wells. In spite of the it in Chinese characters was not available at delays, all the major project objectives were that t-ime. successfully achieved: ZPEB was able to implement the full development of the South 17. The Reservoir Study of the South Wenliu oilfield; one hundred and twenty million Wenliu oilfield was to establish an optimized tons of additional proven reserves were long-term field development plan. ZPEB confirmed in the East Wenliu structure and are continually requested further work from the now under development; and the gas processing consultant, and the study never did come to plant for the recovery and treatment of LPG closure. Nevertheless, ZPEB reported that the products from the associated natural gas was process of sending their technical staff to the installed and is fully functional. consultant's headquarters to assist in implementing technical studies proved to be an 13. Action was taken on environmental effective method for technology transfer. The problems that were identified. During an early experience gained has enabled ZPEB to design supervision mission, Bank staff noted that its own reservoir model with independently corrosion from untreated water had caused purchased software. serious production and environmental problems. T'he Bank recommended, and ZPEB agreed, to Outcome and Sustainability amend the scope of the project to include the design and construction of a water treating 18. Despite the long delays, the project fac ilIity. In addition, the study's outcome was highly satisfactory, in meeting its recommendations for upgrading water handling major goal to transfer exploration and techniques have been disseminated to, and production technology to ZPEB, and assist applied in, oilfields throughout the country. ZPEB increase its oil and gas production. It had an important environmental impact. It 14. Four consultancy-assisted studies enabled ZPEB to stop the wasteful flaring of introduced modem oilfield practices and natural gas, and it found solutions during technology. The Safety Practices Study implementation for eliminating environmentally recommended actions needed to bring the field unsound water processing practices. Its operations safety practices in line with Western successes in improving ZPEB operating safety standard. These recommendations were capacity are likely to be sustainable. It was implemented. less successful in helping ZPEB to improve its institutional management capabilities. Its 15. The Drilling And Well Completion institutional development impact was therefore Practices Study and demonstration program judged negligible. All covenants were analyzed problems that had been encountered in complied with. the past and proposed ways to overcome them. These recommendations were also acted upon, THE KARAMAY PROJECT with excellent results in ter-ms of faster, more efficient drilling and greatly improved 19. The Karamay Project, in Xinjiang completion rates. Province, was the third and last Bank project to focus on increasing oil production. As in the 16. The Management Information System preceding two projects, the project objective Study, which was to assist with the introduction was the provision of technical assistance to of modern oilfield management techniques, enhance the region's long-term productivity. including modem cost accounting was canceled, Karamay's major problem was that it had primarily because the technology to implement massive reserves of heavy oil that it had not been able to develop with its existing  xlv technology. The project was therefore tailored studies and with contractor on the use of new to the requirements for developing and equipment. Both proved to be quite effective. enhancing its heavy oil recovery program, in However, the overseas technical training addition to updating light oil exploration and program for engineers and managers was able production technology. The project also to train only one quarter of people expected. included a Gas Utilization Study for gas that Inadequate early attention to development of had been recently discovered offshore in language skills was a major contributifg factor. Southern China and an EOR study for heavy oil from the Liaohe oilfield in Liaoning Province. 25. Studies: The geological and reservoir studies were successfully implemented, Implementation and Results although with many delays, with the assistance of foreign consultants. The costing study was 20. Procurement started slowly, with successfully implemented by a group of local problems of coordination among the three consultants from other oil enterprises. The Gas concered entities, KOC, CNTIC and MOPI. Utilization study was implemented by CNOOC, the executing agency for this project 21. Light Oil: The exploration program for component. It was only partially successful, in light oil was less successful than expected that it did not fully analyze issues related to during appraisal. The resultant increase in optimum utilization of the gas. production of light oil was about half that expected at appraisal. Project Restructuring 22. Heavy Oil at Karamai : Support for the 26. The Bank worked closely with KOC in heavy oil program was greatly expanded. restructuring the project to take advantage of Instead of supporting experimental pilots, the new opportunities in the rapidly changing project was restructured to support a program conditions in the oilfield. Funds were shifted for full development of KOC's heavy oil from the light oil project component to support resources, including the drilling of over 1100 a greatly expanded program to drill delineation wells. The development program has been and development wells - an increase from the highly successful. Production, which was original 160 to a final 1,126 - and a originally projected to remain at below 50,000 concomitant growth in surface facilities, tons per ylear, rose to 1.4 million tons in 1990 particularly steam generators. It was an and is expected to increase to more than 2.7 extremely successful endeavor; however, the million tons per year by 2000. project resulted in a significant change in the project scope, and the changes were made 2 3. HeavY Oil at Liaohe: The studies for without formnal agreement by Bank Management the Liaohie heavy' oil pilot development program or the Board. showNed that while the program was feasible, the development would not be economically viable Outcome and Sustainability for Liaohe heavy' oil unless the international price wxas over $30 per barrel. The large scale 27. The Audit finds that the outcome of the pilot wvas abandoned. Karamay project was highly satisfactory, as it met its objectives of introducing modem oilfield 24. Training: A training center for oilfield technology, including management, financial workers was built after some delay. The center costing and control, and of assisting KOC to is operating effectively. The other major increase its oil production levels. Institutional source of training in the use of new technology development, particularly that related to was on-the-job training with consultants on financial management and controls also appears  xv to have been significant. The benefits are likely 3 1. Internal Procedures: The Chinese to be sustainable in the future. All covenants internal procurement approval process required were complied with. coordination of approvals by five separate Chinese agencies. Even after the Bank raised COMMON FINDINGS AND LESSONS the issue, it was unable to convince the GOC to make the changes needed to establish effective Delays in Project Implementation inter-agency working groups to facilitate the process, although commitments to do so were 28. Delays of up to two years were made numerous times. encountered in the procurement of goods and services for all three project. There were, of 32. Lesson: The Bank should have insisted course, many causes for these delays, including: that these problems be resolved as a condition (i) the Borrower's inexperience in working with of moving forward with the Karamay project. Bank procurement procedures; (ii) cumbersome Both the Bank and the GOC have learned from internal clearance procedures, combined with a their experiences with these projects. In the fragmentation of responsibilities among various recent Sichuan Gas Project, the Government has Government agencies; and (iii) protracted organized a Coordination Committee to ensure contract negotiations after the contractor had that procurement processing remains on track. been selected, particularly on revised terms of reference for the studies and related revised fee 33. Protracted Negotiations: Substantial structures, but also for some specialized delays also took place after the winning equipment. There are, however, actions that the contractor had been decided. Negotiations on Bank can take to lesson the impact of these the final terms and conditions of contracts often causes of delay. took up to 10 months, an exceptionally long time by Bank standards. For consultant studies, 29. Inexperience: The Bank had some negotiations took up to 18 months. anticipated the need for a new Borrower to learn Bank procedures and established a 34. Recommendation. The Bank should procurement training program early in the consider intervening in contract negotiations project cycle. This training program was when they extend beyond what would appear to established many years later, after the problems be normal and appropriate, and the work to be became pervasive in all Bank lending done is on the critical path, or when a pattern operations. of extended negotiations begins to develop. In such cases the Bank could request a 30. Recommendation: Training programs participatory role as a neutral facilitator, to keep for Bank procurement and loan disbursement the negotiations in line with the scope of the practices should be part of any project with a original bidding documents. Such intervention new borrower or new executing agency, could be particularly important when the results particularly important when the country itself of the consultant study are considered critical has only recently joined the Bank Group, and is for proper implementation of other project still unfamiliar with international bidding and elements. Bank procedures. Where inter-agency coordination is necessary, a procurement Choice of Technology seminar should be given exclusively for all the staff who will have to Nvork together on the new 35. All three projects purchased drilling project. In this way the seminar could initiate simulators for their training institutions. the process of teamwork that is needed for Technology was changing rapidly in the area. efficient project implementation. The winning bidder in the Daqing and Karamay  xvi projects committed himself to technology implementation. These delays were caused by upgrades that were not yet in production. The differences in opinion about what the terms of equipment arrived without the computer reference required and changes in the study hardware and software needed operate it. scope during the course of implementation. Before the problem could be resolved, the Bank staff should have carefully monitored contractor went bankrupt. No replacement changes in study scope and should have worked equipment has been bought, and, as a result, all with both parties to ensure that unrealistic three centers have been unable to provide this expectations did not push the consultant to important training. promise more than could be delivered. When Borrowers have had little or no experience in 36. Lesson: Bank borrowers should working with foreign consultants, Bank purchase only proven technology. Bidding technical staff should join interim project documents and equipment specifications should reviews. reflect this requirement before they are approved. 41. Safety studies are an important part of the modernization of any oilfield operation, 37. Lesson: Borrowers who have had little particularly when the operation has had little or experience with commercial law, may need no contact with modem western safety advice from the Bank on the limitations of legal standards. The direct involvement of oilfield remedies for resolving commercial disputes, operating staff greatly improved the likelihood including, when appropriate, advice to accept of effectively implementing the study the loss and start over again, so that the project recommendations. objectives can be met. 42. Cost accounting and studies can be Turnkey Contracts successfully implemented by local groups, if these groups have access to the techniques used 38. The failure of the prototype monitoring in more advanced countries. There are many station in the Daqing project once again advantages to implementing such studies with demonstrates that the coordination and quality local groups, the most important of which may control function is probably the most difficult be that it establishes the internal "ownership" of part of the construction of any plant. the results which makes dissemination and adoption much more likely. 39. Recommendation: This complex management function should not be performed 43. The Gas Utilization Study was by a Borrower with only limited experience in intended as a vehicle for improving the working with foreign suppliers on complex coordination between gas producing and using projects. In such cases, turnkey contract should agencies. It did not achieve this goal. Such a be used to ensure the completion of study is unlikely to be successful if only one of complicated facilities that require efficient the concerned agencies is involved in its interfacing of many different pieces of execution. If Bank staff are unavailable for equipment, such as the Daqing prototype detailed supervision of studies undertaken by surface facility. local groups, arrangements should be made to have an international expert review the study at Implementation of Studies critical junctures, since there may be no internal critical review process. 40. Study Delays: In addition to the delays in initiating consultant studies, there were frequent delays and extensions during  xvii Transfer of Technology. program should include training of management and business staff, in addition to technical staff, 44. The transfer of advanced oilfield even if these staff are not expected to take other operating technology and know-how was the foreign courses, since technical stal'l'rarely have most important achievement of the three time to translate materials when thcy return. projects. The transfer took place through many channels, the most important of which were: CONCLUSIONS i) The training, both in China and abroad, 47. The three projects of this Audit reflect provided by the suppliers of modern the first stage of the development of Bank and sophisticated equipment purchased assistance to China's Petroleum Sector. They under the project. focused primarily on introducing modern technology, the training of staff at all levels in ii) The involvement of the implementing the use of this technology, and utilizing this agency's staff in working with the technology to improve the productivity and consultants, both in China and at the safety of oilfield operations and to increase the consultant's headquarters, on the volume of oil that could be produced from various consultant studies, particularly these fields. In these endeavors they were those related to reservoir analysis, highly successful. New technology was oilfield practices and safety. successfully introduced, training ccnters were established to train staff in all aspects of iii) Consultant assistance, at the oilfields, modern oilfield operations, productivity was with the initial implementation of the increased, and a great deal more oil was recommendations emanating from their produced than would have been possible using studies, particularly in the areas of the older, outdated technology previously drilling and oilfield practices and safety available. standards. 48. The results of the technical assistance iv) The establishment of permanent and staff training must be ranked as the most training institutions for skilled workers important of achievements of these projects, in and the training of teachers, both in spite of the delay caused in the actual training China and overseas, in the specialized programs. The capabilities of all three curricula and teaching methodology operating companies and their contribution most effective for learning advanced towards the petroleum industry in China have oilfield techniques and practices. been significantly enhanced by the implementation of these projects. 45. Recommendation. The Bank should consider replicating in other countries the same 49. The Audits highlight the issues of the approach to transfer of technology that it has effectiveness of transfer of technology in this utilized so successfully with the China project because it believes that the techniques petroleum loans. used here could be and should be replicated in other countries, particularly those with large but 46. Training Abroad. When foreign technically behind the times petroleum language training is needed for the effective industries. It also highlights the difficulties transfer of technology, it should be included as encountered when the Bank starts project a specific project component. It must be lending operations in a new country, and implemented early, since it is always a time- proposes ways in which these difficulties could consuming process. This language training be overcome in other countries that have  xviii limited experience working with foreign with the petroleum authorities. If the Bank suppliers and are unfamiliar with the Bank's intends to continue to be active in the Energy procurement procedures. sector, it will need a broader understanding of sector priorities. Sector Review and Policy Dialogue Bank Lending for Oil Development in China 50. The projects were appraised without any significant sector review or sector policy 53. The Bank stopped virtually all oil sector dialogue. By sidestepping sector policy issues, work in China after the introduction of OMS the Bank was able to assist in speeding up the 3.82 in 1984. The next two petroleum projects rate of technical progress in the petroleum were for technical assistance. sector at a critical juncture in China's petroleum development efforts. The Audit believes that 54. OMS 3.82 takes the position that Bank this flexible approach greatly enhanced the loans should not support wildcat exploration Bank's effectiveness in making an important efforts. The high risk nature of such impact on the sector. undertakings make them unsuitable for the use of borrowed funds, and international oil 51. There were, however, many sector companies have a clear comparative advantage issues where a policy dialogue might have in technology know-how. It also takes a helped sector performance, such as lack of reasonable position on countries with limited autonomy at the enterprise level, price controls petroleum activities. However applying the and quantitative target setting instead of same approach to resource development to efficiency oriented profit criteria. In the early countries with a very large, established sector, 1980s, China was not ready to make policy with a massive petroleum production needs to changes in these areas. China is now moving be reconsidered. In these limited number of rapidly towards a market oriented, decentralized cases, a substantial part of the proven reserves economy. The Bank has been working with the should, and will, continue to be developed by Government on evaluating alternative ways of national enterprises, since it is unlikely that restructuring the petroleum sector to increase these operations can be transferred to foreign competition among foreign operating entities, joint ventures on reasonable terms. It makes and to introduce competition. An expanded little sense in these cases to refuse to assist in sector policy dialogue is needed, particularly in the transfer of modern technology to these the areas of pricing and investment priorities. national operators. 52. The Bank has done little in the way of basic sector work. The original choice of projects was left to the Chinese authorities (MOPI), both with no independent effort made to prioritize the sector's investment program. Given the time constraints, the size of the country, and the significance of the first three projects, this approach was a reasonable way to initiate a sector lending program. A sector policy review was implemented in 1990, but it looked mostly at the institutional issues. There has yet to be a review of the country's major oil and gas operations. The Bank is, therefore, unable to discuss sector investment priorities  PERFORMANCE AUDIT REPORT CHINA DAQING OILFIELD-GAOTAIZI RESERVOIR DEVELOPMENT PROJECT (LOAN 2231-CHA) 1. BACKGROUND 1.1 China's petroleum production increased from 10 million tons per year in 1960 to nearly 110 million tons in 1980, but declined during 1981-1982. There had been no new major discoveries in the 1970's and there was little likelihood that future large discoveries could augment production during the 1980s. Offshore exploration, with its high risks and specialized requirements, had been contracted out to multinational oil companies. The Ministry of Petroleum Industries (MOPI) came to the conclusion that China was unlikely to increase petroleum production, or even maintain it at its current level, as long as the industry continued to use outdated technology. In the short and medium term, increased output would have to be achieved primarily through expanded production in and around existing oilfields, and this could only be accomplished through the introduction of modem production and exploration technology. It was within this framework that the Government of China (GOC) approached the Bank for assistance in rehabilitating and modernizing China's petroleum sector. 1.2 The Bank's petroleum sector lending in China had three basic objectives: first, to improve the development of the known hydrocarbon-bearing structures, thereby partially off-setting the anticipated decline in domestic oil production; second, to provide a vehicle for the introduction of modern technology through the financing of modem equipment and the technical assistance in optimum utilization of this equipment; and third, to upgrade the operating, technical, and managerial skills of China's oil industry personnel. 1.3 The Daqing project was identified by MOPI as among the highest priority projects for modernizing the operations of petroleum industry, primarily because Daqing was the largest petroleum field in China, where a successful rehabilitation program would have an important impact on China's aggregate petroleum output. The introduction of modern technology would be a critical element in the success of Daqing's long-term operations, because the company's largest oilfield had been fully developed, and in spite of an extensive secondary recovery effort through water flooding, production was beginning to decline. Oil was no longer free flowing but had to be pumped, and the limits of secondary recovery efforts through water flooding were becoming apparent. Furthermore, oil had been discovered in a much deeper horizon, but Daqing lacked the technology needed to efficiently drill and complete production wells at this depth.  2 2. PROJECT OBJECTIVES 2.1 The broad objectives of the Daqing Oilfield Project were: (a) To augment oil production through the development of the Gaotaizi reservoir; (b) To establish a training center for skilled workers and another for engineers and technical staff, (c) To increase reserves through the support of an exploration program using modem seismic data gathering and processing equipment; and (d) To implement this program in addition to the imported equipment, DPAB would receive technical services in the form of six studies covering all aspects of oilfield operation practices; 2.2 One of the most innovative features of this project - and the following two petroleum development projects - was the effort made to maximize the impact of the transfer of modem technology, which was the central project goal. First, it was agreed that Bank funds would be used only for the import of equipment that embodied modem technology, such as drilling, cementing, and down-hole testing equipment, and a seismic data processing center, instead of standard oilfield materials such as tubing and drill bits. Second, it was agreed that, since the transfer of technology required an extended learning process, all equipment purchase contracts would include a requirement that the equipment supplier provide on-the-job training in the use of the equipment, both in China and in foreign countries where the equipment was in operation. 2.3 The project was appraised in February 1982, approved by the Board in January 1983, and completed in October 1990, four years after originally planned. Project implementation and results were essentially as described in the PCR, and are summarized in the following section. There were no sector policy conditionalities associated with the loan. 3. PROJECT IMPLEMENTATION AND RESULTS 3.1 The Gaotaizi reservoir was successfully developed. It proved to be substantially larger and more productive than originally anticipated. On the basis of the exploration data generated during project implementation, the estimated areal extent (size) of the oilfield has increased substantially, as have the reserve estimates. Reserves, which had originally been estimated by the Bank consultants at 32 million tons, and by DPAB at 51 million tons, are currently estimated at 76 million tons. The extended size of the field resulted in an expanded development program with the first phase, covered under the project, implemented between 1982 and 1985, and a second phase, which was outside the project scope, implemented between 1986 and 1989. 3.2 As a result of the recommendations made in the reservoir engineering, well drilling and well completion studies implemented under the project, production has also increased significantly above appraisal estimates, both on a per well and a total basis. Average daily production peaked at 26 tons  3 per well in 1985, compared with the appraisal estimates of 19 tons, and total field output peaked at 5.0 million tons in 1987 and 1988 compared with the appraisal estimate of 3.8 million. Accumulated production in 1989 was 24.8 million tons, compared with the projected 17.7 million tons. Exploration 3.3 The introduction of state-of-the-art seismic data acquisition, processing and interpretation equipment and technology and the training associated with its introduction contributed to a marked improvement in DPAB's success in identifying prospective locations for its exploration drilling program. As a result, the success ratio increased from 32% to 48%, under much more difficult terrain than could have been worked on with the older equipment. The Prototype Production Station 3.4 The facility was completed three years behind schedule, primarily as a result of delays in the completion of the consultancy study. The first design was for a facility more expensive than estimated at appraisal, primarily because the optimal size suggested by DPAB was to handle 100 wells, far larger than expected at appraisal. The cost for this first design was almost four times the amount allocated under the project -- US$22 million versus US$6 million. Since the foreign exchange was not available under the project and MOPI was unable to allocate the additional funds required for the prototype, the design was changed to a much smaller, 20 well plant. Since this was a prototype plant, the smaller facility was considered appropriate. 3.5 DPAB engineers leamed how to use up-to-date standards and specifications for the design of oilfield collection and gathering stations, and are now able to design all their own facilities. However, because some of the contractors delivered faulty equipment, the monitoring aspects of the facility never worked. As a result, the prototype facility was unable to meet its target of improving the standards for monitoring individual well operating conditions and production levels on a continuous basis. Studies 3.6 Five studies related to the transfer of oilfield technology were implemented under the project. The Reservoir Engineering Study, Drilling and Completion Practices Study and Safety Study formed the core of the program for transfer of technology outside the technology embodied in equipment purchases. While all the studies were successfully implemented and were highly successful in transferring modem oilfield technology to DPAB, they all suffered from delays ranging from two to six years. 3.7 The Reservoir Engineering Study was completed two years late. Its objectives were, first, to design a master plan for development of the Gaotaizi reservoir and, second, to provide training in advanced methods for designing and implementing reservoir modeling, so that they could continue to plan future reservoir development programs. Some of the study results were of considerable importance for improving the way DPAB implemented its field development program. The study identified oil bearing sands that had previously been omitted from production plans. Completion of wells in these sands has been an important element in allowing Daqing to maintain its planned production levels. The study also identified additional reservoirs that had not been previously identified by DPAB, thereby providing additional suitable locations for drilling new production wells.  4 3.8 The study also proved highly successful as a vehicle for the transfer of technological know-how. DPAB staff engineers were able to use the methodology they had learned to create their own reservoir model, using software they had obtained with the purchase of their computer. With this new software they were eventually able to update the development plan for the Gaotaizi reservoir, and to model other reservoirs in the area. 3.9 However, the study failed to meet the expectations of DPAB, in that it did not establish a masterplan for the development of the Gaotaizi oilfield. By the time the final report was delivered to DPAB, its broad recommendations had already been incorporated into DPAB's thinking, but its masterplan was already obsolete. Because the contract had failed to include the purchase of the underlying modeling software and hardware needed to rerun the model, DPAB was unable to update the model results to take into account new drilling and production data that had accumulated since the original field data had been transmitted to the consultant. The report on the model and the accompanying proposed development masterplan was, therefore, useful only as a historical document. 3.10 Lesson. It is imperative that the operating company should acquire the hardware and software needed to continue to carry out their own reservoir modeling requirements, even if this equipment is incompatible with the modeling equipment used in their training. 3.11 The objective of the Drilling and Completion Study was to identify the ways DPAB could improve their oilfield development technology. It was started two years behind schedule and was completed almost four years behind schedule. One of the main delays was caused by an inaccurate description in the Terms of Reference for the study of DPAB's drilling needs. The problem appears to have been that the terms of reference were completed by a consultant who had only visited the Daqing oilfield briefly, and had only a limited knowledge of the geological conditions encountered there. As a result many changes had to be made, both before and after the bidding took place, to ensure that the study would be one that would fit more appropriately DPAB's requirements. For instance, one of the components was an evaluation of water jet injection drilling, which could not be used in Daqing's geological conditions, because it would damage the reservoir. Nevertheless, even with the long delays, the final results were impressive. Using the recommendations of the study, DPAB was able to reduce its drilling and well completion time by 30%. Perhaps even more importantly, its deep drilling problems were satisfactorily resolved, enabling it to drill and complete successfully 122 new deep wells, where the previous five attempts before the study was undertaken had all been abandoned before completion. 3.12 Lesson: Studies designed to evaluate and recommend improvements for oilfield and management practices need to be designed jointly with the executing agency's management. Such studies can be implemented far quicker when they are designed in a way that establishes ownership on the part of the agency to be studied. This process should be accomplished during appraisal, or, at the latest, before project effectiveness, if they are to be implemented on schedule. If Terms of Reference are being revised during contract negotiations with the successful bidder, close supervision is also advisable. 3.13 The Safety Study was delayed by four and a half years. Much of the delay was due to the lengthy intemal procedures needed to establish an acceptable Terms of Reference, and the long negotiations required to reach agreement with the contractor on an acceptable study program. The study was further delayed by the need to change contractors, (and renegotiate the study program) after the original winning bidder went bankrupt. Eventually this study proved to be a highly effective tool for  5 improving safety standards at Daqing. Comparable statistics for before and after the study show a decline in serious accidents after the study recommendations were implemented to less than one-third their pre-study level. 3.14 The study was particularly innovative because it involved the operations personnel at every level. It was organized as a joint activity between the consultants and numerous operational level committees. Eight foreign experts held 34 separate group forums to identify and discuss over 500 safety issues. The final documentation was fully translated into Chinese to facilitate its dissemination to operating personnel. Study results were instrumental in the modification of the design of the Daqing multi-purpose oil tank storage facility, in the design of fire fighting facilities, and in the use of safer drilling techniques. 3.15 Lessons. Safety studies are an important part of the modernization of any oilfield operation, particularly when the operation has had little or no contact with modem western safety standards. The direct involvement of oilfield operating staff greatly improved the likelihood of effectively implementing the study recommendations. Training 3.16 Training of both engineers and skilled workers was an important part of the project's objective for the transfer of technology. A large part of the training was accomplished through the creation, for the first time, of formal technical training centers within the oilfield region for skilled workers and for engineers. The training centers have been staffed by personnel sent abroad under a program financed by the project to learn the most up-to-date technical standards and teaching methods, and by foreign experts who were invited to Daqing to design courses and specifically train local staff. The program has been extremely successful, with more than 10,000 engineers and skilled workers already having completed various three-month to one-year courses. 4. PROJECT ISSUES Delays In Project Implementation 4.1 Delays of up to two years were encountered in the procurement of goods and services for the project. There were, of course, many causes for these delays, including: (i) the late start in preparing and issuing the draft bidding documents by outside consultants; (ii) the borrowers inexperience in working with Bank procurement procedures; (iii) cumbersome internal clearance procedures combined with a fragmentation of responsibilities among various Government agencies; (iv) protracted contract negotiations after the contractor had been selected, particularly on revised terms of reference for the studies and related revised fee structures; 4.2 In addition, there were frequent delays and extensions in the implementation of consultant studies, due to differences in opinion about what the terms of reference required and sometimes due to the desire on the part of the Borrower to expand the scope of the original terms of reference. 4.3 This was the first Bank loan to the petroleum sector, and one of the first Bank loans to China. One should therefore not be surprised that implementation went less smoothly than planned, as both the  6 Bank and the Borrower learned about the operating practices, procedures, and policies of the other. The PRC concluded that the problems of lack of experience were exacerbated by inadequate interagency coordination and cumbersome internal clearance procedures. 4.4 The PCR suggested that the Bank could have helped reduce the delays in consultancy studies by assisting the project entity in drafting a better focused scope of work in terms of reference for consultant studies, and that these draft terms of reference should have been prepared before the field appraisal rather than during project supervision. The Audit is in full agreement with these observations. However, it found that there are a number of additional operational lessons that can be learned from the experience with these three first petroleum projects in China. These lessons may help to minimize procurement delays in the future, both in China and in other countries new to the Bank's procedures. The Prototype Petroleum Production Station 4.5 The objective of this prototype facility was to introduce design technology and equipment which would optimize the processing of crude oil, water and natural gas from the reservoirs (to minimize the energy requirements to heat and transport them). It was also supposed to introduce an accurate method for continuous metering of individual production and injection wells so that reservoir performance could be monitored and optimized. As discussed below, this project component met with several difficulties and was never made operational. 4.6 Although DPAB had never worked with foreign contractors, it decided, with the Bank's concurrence, to act as its own prime contractor for this project component, coordinating all procurement and construction activities. Based on the advice of the consultants, the project was subdivided into nine bidding packages, with DPAB taking responsibility for interfacing the nine contractors. This implementation structure could have worked if all contractors had performed to the letter of their contracts. Unfortunately, the key contractor, who was to provide the central computer monitoring unit, failed to provide the necessary computer software. Other less critical pieces of equipment also failed to work as required. As a result, DPAB was unable to make the facility function. 4.7 Lesson. For complicated facilities that require efficient interfacing of many different pieces of equipment it is important to have a turnkey contract with a prime contractor who will have sufficient financial commitment in the project to ensure that all the equipment works together properly. Furthermore, when things do go wrong, it is much easier to initiate corrective action, with litigation if necessary, for one large contract where there are clearly defined responsibilities, than it is on a number of small contracts where contractors can invariably blame the problem on the interface with the other contractor's equipment. 4.8 Recommendation: The coordination and quality control function is probably the most difficult part of the construction of any plant, and should not be left to an implementing agency who has had only limited experience in working on such projects with foreign suppliers. Choice of Technology 4.9 The Daqing and Karamay projects together purchased five drilling simulators for their training institutions, all from the same supplier. Unfortunately, the equipment arrived without the electronics that were necessary to allow them to function. The experts who were supposed to arrive to put them together never showed up, and sometime shortly thereafter the supplying company went bankrupt. No  7 replacement equipment has been bought, and all these centers have been operating without this central training activity. When it was discovered that the supplier had declared bankruptcy, the Borrowers tried to find other ways to make the equipment function, even at a limited level. Unfortunately, this could not be done, since the time and cost needed to make it work is much greater than the cost of new digital equipment. A number of lessons and recommendations can be drawn from this unfortunate experience. 4.10 Lessons: The choice of appropriate technology may require specialized technical knowledge. The technologies employed by the two suppliers who bid for these contracts were very different. One was an analogue technology and the other was a digital technology. The digital technology, which was much newer, was claimed to be able to accomplish more than the older analogue technology, but was somewhat more expensive. A comparison of the effectiveness of the two technologies was particularly important in this case because the bids were relatively close, and the question of which was the lowest evaluated bidder hang from the evaluation of the various claims and counter-claims about what each piece of equipment could do. However, in reviewing the bids, Bank staff appears to have made no effort to ensure that an adequate evaluation and comparison was made of the effectiveness and usefulness of the two technologies. 4.11 Recommendation: For the procurement of highly complex technical equipment, where Bank staff have no expertise, a special effort should be made to ensure that the appropriate technology is used. When radically different technologies are being proposed for accomplishing the same goal, Bank should insist that a knowledgeable, independent consultant is hired to compare the advantages and the disadvantages of each. 4.12 Lesson: Bank borrowers should not be used as experimental subjects for new and untested equipment when there are alternative, tested equipment available in the market. The lowest evaluated bidder offered an "advanced" model that was not yet on the market. As a result, it was difficult for the executing agency to judge the validity of claims about how the machine would function. In the end, the machine offered by the successful bidder failed to function at all, most probably because the company, under extreme financial pressure, rushed it into production before all the bugs had been worked out. 4.13 Recommendation: Bidding documents should require verification that equipment with similar characteristics and capabilities should be in operation. Preferably, similar equipment should have already been sold and installed so that claims about its effectiveness can be assessed. If the equipment is a new model, especially one with expanded capabilities, then the contract should stipulate the condition that it be tested and approved by the borrower, or an independent agency representing the borrower, as a condition of acceptance of the export letter of credit. 4.14 Lesson: The Borrowers have been unable to resolve the problem, and still are without this important piece of training equipment. After finding that the company was bankrupt and could not meet it's obligations, the Borrowers spent most of their efforts on attempting to salvage the useless equipment, and have yet to consider purchasing substitute equipment. Essentially, those involved appear to have lost sight of the project goal, which was to provide a complete training facility for skilled workers. To ensure that this goal was accomplished, the Bank should have advised the Borrowers to recognize the loss, and to purchase similar equipment from another producer. If loan funds were no longer available under the project, the Borrower should have replaced the equipment with its own resources, to fulfill its obligations to complete the project.  8 4.15 Recommendation. Borrowers in non-market oriented countries, who have had little experience with commercial law in their own country or in developed countries, may need guidance on what they can and cannot expect in the resolution of commercial disputes. When major problems arise, the Bank should provide assistance in suggesting the most likely successful strategy to follow, including, when appropriate, to accept the loss and start over again, so that the project objectives can be met. 5. PROJECT OUTCOME AND SUSTAINABILITY 5.1 The Audit finds that the project results were highly satisfactory and successful in meeting all its major objectives. Its institutional development impact was substantial. The transfer of technology that took place during the project, through the program of studies, the introduction of modem oilfield equipment and the training related to its operation and maintenance, and the technical training for skilled workers and engineers all appear to be fully sustainable. The Audit is in full agreement with the PCR that the potential economic benefits from continuing the field development of the Gaotaizi reservoir is sustainable. Output from the field is expected to be greatly increased as a result of the enormously positive results of the Enhanced Oil Recovery (EOR) study undertaken under the project. It is expected that one of the methods tested under this study (the polymer flooding) will increase the recoverable reserves from Gaotaizi (from 30% of oil in place to 44%). DPAB has sufficient confidence in this new technology to invest over $200 million in a polymer production plant.  9 ZHONGYUAN-WENLIU PETROLEUM PROJECT (LOAN 2252-CHA) 1. BACKGROUND 1.1 China's petroleum production increased from 10 million tons per year in 1960 to nearly 110 million tons in 1980, but declined in 1981 and 1982. There had been no major discoveries in the 1970's, and the Ministry of Petroleum industries (MOPI) came to the conclusion that China was unlikely to maintain its petroleum production level, let alone increase it significantly if it continued to use the outdated technology. MOPI also decided that, while there was great potential for finding new large sources of supply from prospective off-shore areas, there was little likelihood that new large onshore discoveries would add to production during the next decade. Therefore, it concluded that increased production would have to be achieved primarily through expanding the production in and around existing oilfields, which would only come through the introduction of modem production and exploration technology. It was within this framework that the Government of China (GOC) approached the Bank for assistance in rehabilitating and modernizing China's petroleum sector. 1.2 The Bank's lending in the petroleum sector in China was to have three basic objectives: firstly, to develop the known hydrocarbon bearing structures in order to partially offset the anticipated decline in national oil production. Secondly, providing a vehicle for the introduction of modern technology through the financing of modem equipment and the technical assistance in optimum operation of this equipment. Thirdly, in training and upgrading the operating, technical and managerial skills of China's oil industry personnel. 1.3 The Zhongyuan project was one of the first three projects identified by the Government of China as among the highest priority projects (the other two were Daqing and Karamay) for modernizing petroleum practices, where the introduction of modern technology would be a critical element in the success of the country's oil development program. Modern technology was critical in the Zhongyuan oilfields because the reservoirs were quite deep with high pressure gas zones, which made drilling very difficult, and the field geology was quite complex, so that the primitive seismic equipment being used made it difficult to identify optimum drilling locations. 2. PROJECT OBJECTIVES 2.1 The broad project objectives of the Zhongyuan project were to: (i) increase oil and gas production and reserves in the project area; (ii) enhance operational efficiency and strengthen ZPEB's institutional capabilities through staff training and the modernization of their oilfield operating practices; and (iii) extract LPG from the associated natural gas which was being flared.  10 3. PROJECT IMPLEMENTATION AND RESULTS 3.1 All the major project objectives were successfully achieved, in spite of the long delays experienced during implementation. 3.2 The transfer of advanced oilfield operating technology was the most important achievement of the project. The transfer took place through many channels, the most important of which were: * The importation of modem and sophisticated equipment and the related training provided by suppliers of equipment and services, both in China and abroad. * The involvement of ZPEB counterpart staff working with the consultants on the reservoir, oilfield practices and safety studies. The field trips arranged by the equipment manufacturers and the study consultants which acquainted ZPEB staff with actual operating practices in western oilfields, mostly in the US and Canada. * Consultant assistance with the initial implementation of the recommendations emanating from their studies, particularly in the areas of drilling and oilfield practices and safety standards. * The establishment of a training center for 3000 workers a year and the training of teachers, both in Zhongyuan and overseas, in the methodology for preparing the specialized curricula for teaching advanced oilfield techniques and in the utilization of modem audio-visual and simulation model for assisted teaching methods. 3.3 In addition to the transfer of technology, the project also reached its major physical targets, as described in the PCR and summarized below: ZPEB was able to implement the full development of the South Wenliu oilfield; One hundred and twenty million tons of additional proven reserves were confirmed in the East Wenliu structure and are now under development; The gas processing plant for the recovery and treatment of LPG products from the associated natural gas was installed and is fully functional. 3.4 Environmental impact became a serious concern during project implementation. During the early supervision missions, Bank staff noted that corrosion from untreated water had caused serious problems in the tubing of both injection and production wells, and in the production pipelines, which was increasing production costs and also producing environmental pollution, as the number of water and oil spills began to increase. The Bank recommended, and ZPEB agreed to amend the scope of the project to include a study on the appropriate methods for treating water produced by the field and for constructing a water treating facility. Once the water treatment study had been completed, a new water treatment facility was constructed to treat both the produced and injection water. Recommendations  11 for upgrading water handling techniques have been disseminated to and applied in oilfields throughout the country. 3.5 Four consultant assisted studies were also expected to introduce modem oilfield practices and technology, as follows: * A Safety Practices Study, which was to bring the field operations safety practices in line with Western safety standard; * A drilling and well completion practices study and demonstration program which was to analyze the problems that had been encountered in the past and propose ways to overcome them; * A reservoir analysis of the South Wenliu oilfield, which would include an optimized long-term development plan for this field; * A Management Information System, which was to assist with the introduction of modem oilfield management techniques, including modem cost accounting; 3.6 The first two of these consultant studies were highly successful; the third had many problems and was never completed; and the fourth was never initiated. 4. PROJECT ISSUES Findings and Lessons Learned from PCR 4.1 Procurement. Factors that contributed to the early project delays were ZPEB's lack of familiarity with the Bank's procurement procedures, cumbersome internal processing and clearance procedures, and extended delays in contract negotiations. Coordination of clearances among three entities, (ZPEB, CNPC and CNTIC) made the process particularly difficult. Recommendation: In the future the central authorities should delegate procurement authority to the local implementing entity. 4.2 Studies: The Bank should help the executing agency prepare focussed terms of reference for all studies during project preparation, rather than leave this to subsequent supervision missions. This would greatly accelerate the implementation processes. 4.3 Petroleum Prices: Appropriate domestic pricing policies for oil and gas need to be established to assure that production companies can remain financially sound. 4.4 The Audit agrees with all these conclusions and recommendations. Other issues, not fully covered in the PCR are discussed below. Delay in Project Implementation 4.5 The project met with substantial delays in all components with the exception of the drilling of exploration wells. Import of oilfield equipment was delayed on average by two and a half years, studies  12 were delayed by about four years, construction of the building for the training programs, the computer center and the laboratory were delayed by about five years, and operation of the LPG plant was delayed by almost six years. 4.6 Learning Bank Procedures. Bank supervision missions and the PCR tended to lay most of the blame for delays on the inexperience of the various Chinese agencies in working with Bank procurement procedures. While this inexperience played an important role in perpetuating the delays, it is neither a complete explanation nor an adequate justification for them. To the extent that it was a major contributing factors it could have been substantially overcome if the Bank had recognized it early and taken action to overcome it by establishing a procurement training program in the project cycle. This training program was established many years later, after the problems became pervasive in all Bank lending operations. 4.7 Coordination of Chinese Agencies. The problem of the Borrower's lack of experience with Bank procurement procedures was exacerbated by the cumbersome Chinese intemal procurement approval process, which required coordination of approvals by five separate Chinese agencies. The executing agency (ZPEB) had to obtain the approval of the Ministry of Petroleum Industry (MOPI) and the Machinery and Electrical Equipment Import Inspection Wing under the State Council for all technical aspects of the bids. The National Import Agency (CNTIC) had to approve the specifications and issue the bidding documents. All four agencies were jointly responsible for evaluating the bids and negotiating details with the winning bidder. Finally, after the contract was written by CNTIC, the National Committee for Contracts had to approve it.' 4.8 The bidding documents, the bid appraisals and the award of the final contract also had to be reviewed by the Bank. All had to be translated into Chinese, reviewed, then translated back into English for communication to the Bank. Furthermore, since the approval process was a sequential one, in which Bank approvals were requested only after all other approvals were obtained, the whole sequence of translations and approvals having to be repeated when the Bank requested changes to conform with its standards. Finally, when the time came for payments to be made, the National Bank of China had to also review the documentation and approve each step. 4.9 Even after the problems came to light during the first year of project implementation, the Bank was unable to convince the GOC to make the changes needed to improve the situation. The GOC was unwilling to remove CNTIC's monopoly position on foreign trade activities. Nor would the GOC establish an effective inter-agency working groups to facilitate procurement processing. 4.10 The lack of urgency in resolving these types of problems can be seen in the agreement during negotiations, that the project team for ZPEB would be in place within six months after Board presentation (i.e. by September 1983, a year after the Appraisal). In fact, it was not until the first procurement supervision mission in September 1983, that the institutional procedures were reviewed by Bank staff. And in March 1984, a procurement mission noted that procurement was delayed as a result of the Borrower's inexperience with Bank procedures. By this time the Bank had recognized the problems created by the lack of coordination among the responsible agencies, but it appears to have done little to find a resolution to them besides exhorting the GOC to set up a coordination committee. 'The China National Petroleum Corporation (CNPC), which has taken over the role of MOPI, has noted that "the approved procedure among the five agencies was not exactly like that expected" in this simplified description.  13 The problem was supposed to be resolved by the reorganization of CNTIC in March 1985, but Bank missions continued to complain about inexperienced and overworked staff. With such a complex process, it is not surprising to find that there were substantial delays in the initial project phases, delays often of twelve months and more. 4.11 Lesson: This coordination problem should have been identified at the time of appraisal and addressed early on in the project cycle. Although it was already recognized that these procedures would be cumbersome, the Appraisal Mission failed to analyze the implications of these complex institutional arrangements in terms of institutional interface requirements among the institutions through each procedural step. 4.12 Lesson: After a close inspection of supervision mission Back-To-Office Reports and Aide-Memoires, the Audit concludes large supervision missions and new project preparation missions visited China, they held few, if any, discussions with senior level officials about the actions needed to be taken for institutional strengthening. The Audit therefore concludes that one of the major reasons that this problem remained unresolved for so long was that the lone petroleum project procurement specialist was, for all practical purposes, the only person actively engaged in trying to establish the institutional change needed to improve the situation. Although he was able to bring the problem to the attention of the Government, he was unable to get the Government to commit itself to a specific course of action to achieve institutional reforms that could improve interagency communications. 4.13 Both the Bank and the GOC have learned from their experiences with these projects. Many of the procurement problems associated with these projects have for the most part been resolved during the last few years, and it is likely that China's new procurement staff will be much better prepared. In the recent Sichuan Gas Project (Loan 3716-CHA), the Government has organized a Coordination Committee to ensure that procurement processing remains on track. The detailed operation of this committee and its impact on the interface among the various agencies is yet to be determined, and its effectiveness is yet to be tested, but its establishment does indicate that the problem has been recognized at the highest levels. 4.14 Negotiation of Contracts. Substantial delays also took place after the winning contractor had been agreed upon. Negotiations on the final terms and conditions of contracts often took up to 10 months, an exceptionally long time by Bank standards. For consultant study contracts, some negotiations took up to 18 months. In addition, implementation process was also far from smooth. Studies were often extended or delayed due to the borrower's expectations about what the final results should be. These delays were often caused by differences in opinion between the project entity and the contractors on the appropriate scope of the work to be performed and, sometimes on the insistence of the project entities to expend the coverage of certain aspects of the scope. 4.15 Writing the Bidding Documents: There were, in addition, other significant causes for delayed project implementation that could be avoided in the future. The most critical of these was the initial implementation delay, which was in writing the technical specifications for the bidding documents.. This bid preparation process took nine to twelve months instead of the three that had originally been scheduled. The Bank could have greatly reduced this delay. First, it initiated this critical path activity rather late in the project preparation cycle: only shortly before the project was taken to the Board. Second, it apparently chose a firm that it had not worked with before and failed to enforce the agreed time schedule. Having started so late, the Bank needed to maintain a close control and supervision to minimize further delays.  14 4.16 Recommendation: Training programs for Bank procurement and loan disbursement practices should be a required part of any project with a new borrower or new executing agency. These programs are particularly important when the country itself has only recently joined the Bank Group, is undergoing a transformation to a more open economy and is, as yet, still unfamiliar with intemational bidding and Bank procedures. Where inter-agency coordination is necessary, a procurement seminar should be given exclusively for all the staff who will have to work together on the new project. In this way the seminar could initiate the process of teamwork that is needed for efficient project implementation. 4.17 Recommendation: The Bank may need to consider intervening in the contract negotiations when they extend beyond what would appear to be normal and appropriate, or when a pattem of extended negotiations begins to develop. In such cases the Bank could request a participatory role as a neutral facilitator, to keep the negotiations in line with the scope of the original bidding documents. Such intervention could be particularly important when the recommendations of the consultant study are considered critical for proper implementation of other project elements. 4.18 Recommendation: If a project is expected to be implemented quickly, it may be necessary to hire a consultant company to prepare bidding packages during the Appraisal Mission, so that the initial bidding documents could be ready for discussion at, or before negotiations. The Reservoir Study 4.19 The Reservoir Study was supposed to be the central element of an optimal development plan for the South Weiyuan oilfield. However it took four times as long to implement as expected, and never produced the results expected by ZPEB. At appraisal (September 1982) it was agreed that it would be initiated in April 1983, and would be completed within nine months, that is by the end of 1983. Such timing would have been highly optimistic under any conditions. In China, with its complex procurement procedures, and its lack of experience in working with foreign consultant firms, it was totally unrealistic. 4.20 The study was actually started in May, 1984, a year behind schedule. Part of the delay was due to a six-month long negotiations with the winning bidder during which the terms of reference were revised and refined. The study got off to a bad start when ZPEB realized that the consultant's experience was primarily with marine sedimentary basins, rather than continental sedimentary basins, such as those found in Zhongyuan. The study was then dragged out for four years, during which time ZPEB was able to get the consultant to substantially deepen its investigation. Only about 80% of the agreed tasks had been completed when the consultant company declared bankruptcy and stopped operating. However, by this time study results were of only an academic interest, since almost all of the decisions on how to develop the field had already been made and the wells drilled and completed. Furthermore, ZPEB would have been unable to expand on the reservoir analysis for the next phase of secondary enhanced recovery, because the contract had not included the modeling software needed to extend the results. 4.21 In spite of the failure of the study to come to closure, ZPEB reported some important benefits derived from the study in terms of transfer of technical knowledge. Engineers who participated in the study were trained at the consultant's headquarters in the advanced theory for conducting reservoir engineering studies, including the handling of the software and hardware. The experience gained while  15 working with the consultants has enabled ZPEB to design its own reservoir model with independently purchased software. 4.22 Lessons: First, technical studies in Bank projects often take much longer to organize and implement than they would under ideal conditions in developed countries. Some of the more important difficulties are: The borrower may be unfamiliar with working with foreign consultants, and may therefore not be able to take into account the limitations of the consultant. * There are likely to be confidentiality considerations and communications difficulties between the consultant and the executing agency that make data transfer more complicated. * The data base that the consultants must work with is often of a significantly lower quality than that found in a similar situation in a technologically sophisticated OECD country company. In fact, information technology is often at the heart of the technological improvements that the Borrower is looking for. * Physical distances and limited communications facilities that one often finds in oilfields in borrowing countries can slow down communications and direct interactions. 4.23 Second, the method of implementing the study was more important for the transfer of Technology in this project than the study's final technical conclusions. The process of sending the Borrower's technical staff to the consultant's headquarters to assist in implementing technical studies proved to be an effective method for obtaining maximum benefits from the transfer of technology. 4.24 Recommendations. First, Bank staff need to take these difficulties into consideration if they are to establish a realistic timetable for major studies; and if a study is supposed to be on the critical path for project implementation, as this one was, then Bank staff need to identify the likely problems, propose remedies, pay close attention to the implementation process, and react quickly to the first signs of problems. 4.25 Second, when borrowers have had little or no experience in working with foreign consultants, the Bank should consider suggesting that its technical staff be present during negotiations and during interim project reviews, to act as neutral facilitators. 4.26 Third, in the petroleum industry, where data gathering is an integral and continuous part of resource development planning, project design should include the transfer of technology for continuously updating development planning studies. To accomplish this goal, petroleum reservoir studies should always include funds for the purchase of the hardware and software needed to follow through with continuous updating of the study results. 4.27 Finally, the Bank should consider copying in other countries the same framework as it has utilized so successfully with the China petroleum loans for integrating on-the-job training with technical assistance studies.  16 The Management Information System (NIS) Study 4.28 The Management Information System (MIS) Study was intended to establish a data management and retrieval system that would allow ZPEB management to have at their fingertips up-to-date information on the company's technical and financial operation, particularly those related to their exploration and field development programs. This type of MIS is in use in all international companies, and, in theory, should have been a good working tool for Zhongyuan. However, after the bidding and bid proposal evaluation had been completed, ZPEB decided that the potential from the implementation of the study would not justify the cost of over $2 million dollars. After many delays and much discussion, the Bank finally agreed to cancel this project component. 4.29 The study had been strongly recommended by the Bank Appraisal Mission, but ZPEB was never very enthusiastic about it. This difference of viewpoints was never fully resolved, at least partially because Bank staff failed to recognize the basic reasons for ZPEB reluctance. This reluctance was based on a strongly held belief that a computerized MIS system could not be effectively implemented into their operations. The Audit believes that their assessment was correct. At that time computers were very expensive and were used only for highly technical seismic analysis which could be handled in no other way. Outside this area, managers and staff were unfamiliar with their operation. More importantly, few people could be expected to learn to use the MIS system, because at that time all programs had to be written and operated in English. (An effective method for writing in Chinese on a computer keyboard was not developed until 1989.) Without the use of Chinese characters, the system could be used by only a handful of English educated technical staff, and therefore, was highly unlikely to become a working tool for management. 4.30 Recommendation: The Bank should continue to encourage enterprises in China to implement MIS Studies and to computerize their operations. Conditions for implementing such a study have greatly improved in the last few years. Inexpensive desktop computers are now found at all levels, off-the-shelf software systems are available at a reasonable price, and a system for using Chinese characters has been developed and is in general use. Therefore, an MIS program would most probably be a useful component for any future petroleum project in China, as well as in other countries. 5. PROJECT OUTCOME AND SUSTAINABILITY 5.1 Despite the long delays in the implementation process, the project was highly successful in transferring exploration and production technology to ZPEB, and in assisting ZPEB increase its oil and gas production. It had an important environmental impact, in that it ensured the utilization of natural gas that was previously being flared, and found solutions during implementation for eliminating environmentally unsound water processing practices. The Audit finds that the project was highly satisfactory, and that its successes in improving ZPEB operating capacity are likely to be sustainable. It was less successful in helping ZPEB to improve its institutional management capabilities. Its institutional development impact was therefore negligible.  17 KARAMAY PETROLEUM PROJECT (LOAN 2426-CHA) 1. BACKGROUND 1.1 Until the late 1970's , China was remarkably successful in implementing a policy of total self-reliance in petroleum production. However, the rate of discoveries did decline throughout the decade, and there were no major finds in the early part of the 1980's. In the early 1980's GOC turned to the Bank to provide technical assistance to enhance the productivity of Chinese oil companies, primarily through the identification of technological problems, appraisal of hydrocarbon prospects, and assistance in the selection of technologies which could be disseminated rapidly and would help upgrade ongoing production and exploration efforts. 1.2 The basic rationale for the Bank's participation in China's petroleum sector therefore lay in the packaging of technical assistance programs and subsequently overseeing their implementation. Because conditions are so diverse within the different petroleum producing areas of the country, technical problems of each oil company are quite unique and require the creating of an individually focused package of technical assistance for each oilfield. 2. PROJECT OBJECTIVES 2.1 Karamay was the third and last Bank project to focus on increasing oil production. As in the preceding Daqing and Zhongyuan projects, the project objective was the provision of technical assistance to enhance long-term productivity. In Karamay the assistance was tailored to the requirements for enhancing its heavy oil recovery program, in addition to updating its light oil exploration and production technology. 2.2 The project had four major components: * Support for an expanded exploration program for light oil, including seismic data acquisition, geological and reservoir studies, and processing and the drilling of about 370 exploration, appraisal wells. This massive exploration program was expected to add some 350 million tons of light oil reserves (oil-in-place), in support of KOC's plans to increase light oil production from 4 million tons in 1983 to 7 million tons in 1990. * Evaluation of the potential for establishing production from heavy oil oilfields that have already been discovered Karamay and in Liaohe, including design of pilot projects to test alternative methods for thermal recovery of this oil. This component was expected to begin to increase heavy oil recovery in the 1990's. Support KOC's overall operations by providing critically needed technical inputs for KOC's exploration and development program, and establishing a training center for skilled workers, while maintaining, through supervision, the implementation and  18 dissemination of new technologies, and implementing a costing study to improve KOC's methodology for investment planning. Support future operations for the development of China's off shore gas resources by carrying out a Gas Utilization Study for gas that had been recently discovered offshore in Southern China. 2.3 The project was approved by the Board on May 29, 1984, became effective September 15, 1984, and was completed on March 31, 1991. 3. PROJECT IMPLEMENTATION AND RESULTS 3.1 As in the first two petroleum projects, there were significant delays in procurement and in the execution of technical assistance components. As a result, some project benefits were delayed and the closing date of the project had to be extended by two years. The primary reasons for these delays were similar to those for the previous projects: (i) lack of coordination in the procurement process among concerned agencies, with KOC responsible for deciding what to purchase, the International Trading Corporation responsible for communicating with purchasing from foreign suppliers, and the China National Petroleum Corporation (CNPC) responsible for approving all disbursements; (ii) the subsequent slow process of soliciting and evaluating bids; (iii) protracted contract negotiations, with frequent changes in technical specifications; and (iv) frequent revisions of scope of contractual work, both during contract negotiations and during implementation. Light Oil 3.2 The exploration program for light oil was much smaller and less successful than expected during appraisal. Only 201 exploration/appraisal wells were drilled, compared with the 370 well program expected at appraisal. Discoveries of new fields and extensions of known fields added about 150 million tons new light oil reserves (in-place). The relative lack of success led to substantial adjustments in developing drilling plans, including a shift in drilling efforts to the developing of the new reserves, with the drilling of 500 development wells. The resultant increase in production of light oil was about 1.9 million tons per year in 1990, compared with the increase of about 4.1 million tons expected during appraisal. Total light oil production from previous and new discoveries is expected to average about 4.4 million tons in the first half of the 1990's and decline to 2.2 million tons by 2000. Heavy Oil at Karamay 3.3 Support for the heavy oil program was greatly expanded under the project. Instead of supporting experimental pilots, the project was restructured to support a program for full development of KOC's heavy oil resources, including the drilling of over 1100 wells. The development program has been highly successful. Production, which was originally projected to remain at below 50,000 tons per year, rose to 1.4 million tons in 1990 and is expected to increase to more than 2.7 million tons per year by 2000. The reason for the restructuring is discussed in more detail in paragraphs 4.5-4.8  19 Heavy Oil at Liaohe 3.4 The studies for the Liaohe heavy oil pilot development program, which included an economic analysis of the benefits, showed that while the program was feasible, the development would not be economically viable for Liaohe heavy oil. The large scale pilot was abandoned. The transfer of technology was, however, effectively implemented in that it was applied subsequently to other heavy oil fields in the Liaohe region. Training Center 3.5 As in Daqing and Zhongyuan, a training center was built, a training curricula was established to systematically train KOC's skilled workers and engineers, and instructors for these courses were trained. Completion of the center was greatly delayed by almost four years, primarily because it took KOC a long time to initiate construction of the physical facilities and to initiate and implement the study needed to design the course program. When the program was established, a core of instructors were trained abroad in modern training techniques and they returned to Karamay to train a cadre of local instructors. When finally established, the program was highly successful, training some 4000 skilled workers since it was opened. It has been hampered, however, by the failure of the drilling rig simulation machine to function. Studies 3.6 Four independent studies were carried out under the project in addition to the work related to establishing a training program for skilled workers. The two technical studies were carried out by consultants with the assistance of KOC staff. Both encountered significant delays, both before and after the contracts were signed. In addition to the direct benefits from the results, the studies created important indirect benefits through the transfer of technical know-how to the KOC staff who worked with the consultants, and were trained by them in modern methodology. The other two were implemented by local groups. 3.7 The Reservoir Study was successful in optimizing the development of the Wuerhe light oil field. The study included the creation of a computerized dynamic reservoir simulation model, and the testing of modern well completion techniques in the difficult "tight" reservoir conditions found in this oil field. The results far exceeded expectations. Implementation of the consultant recommendations for existing wells in the field resulted in a doubling of production from 300,000 to 600,000 tons per years and a reduction in the normnal decline in field production from the pre-study expectation of 15% per year, to only 3% per year. 3.8 The Geological Study was less than fully successful in providing new leads for KOC's exploration efforts. It had originally been intended to develop a comprehensive understanding of the structural geology and hydrocarbon potential of the entire Junggar basin where the Karamay oilfields are located. As implemented, however, it focused on only one small section of the basin, where KOC had direct control of the operations. The results were of limited use for KOC because they focused almost exclusively on identifying potential drilling locations in a set of local structures where KOC had made one small discovery. The study provided discouraging data on the quality of the reservoir rock, which was confirmed through the drilling of three exploration wells on the most promising identified locations, all of which were non-productive.  20 3.9 The Costing Study was carried out by Chinese experts, rather than foreign consultants as originally proposed. Experts were chosen from ten petroleum institutions to recommend ways to introduce modern financial management and cost control methodologies. Terms of reference were reviewed in depth with Bank staff. The comprehensive study identified the most serious problems in KOC accounting and cost methodology, and recommended specific practical improvements. These improvements have allowed KOC to have a much more accurate picture of both the cost of producing oil from individual fields, and in many cases from individual wells, as well as the income generated by these fields and wells. It also allowed KOC to determine the cost of drilling each well and to establish standard drilling costs that could be used as comparators to judge future efficiency gains. KOC reviewed the study recommendations with the Bank and has integrated them into their operating practices. 3.10 The South China Gas Utilization Study was implemented by staff of the China National Offshore Oil Corporation (CNOOC), rather than by foreign experts as originally envisaged. CNOOC requested that it do the work itself because it had a direct interest in the study and because it owned the gas that was the subject of the utilization study. The study was less than fully successful. It did a good job of evaluating the cost of developing and transporting the gas to potential users, but it failed to cover issues related to the economics of end user investments, which was the most critical input for the process of developing an optimum gas utilization plan. 4. ISSUES Findings and Lessons of PCR Report 4.1 Economic Return and Sustainability: The project is expected to have a 31% ERR, based on the incremental cost and incremental volume of oil produced. In 1991, the cost of producing heavy oil was $53 per ton compared with a value of $95 per ton, while the cost of light oil was $33 per tons, and its value was $110 per ton. While costs may have gone up slightly since 1991, the PCR found that the rate of return is expected to still be in the highly respectable 25%-30% range. The production increases are expected to be maintained over the next 10 to 12 years, assuring sustainability of the project. The KOC staff were highly motivated to absorb new skills and use new technology. The technical enhancement of KOC operations can be expected to be maintained with continued contact with the outside world for exchange of technical knowledge, which is expected. The Audit is in full agreement with these findings. 4.2 Studies: Some of the consultant studies were expanded to cover a wider scope than was strictly necessary for the purpose of the project, which greatly increased the time required for their completion. The Bank could have assisted in trimming the scope to the project needs, and thereby helped to avoid delays in study completion. (The Audit is in full agreement with this conclusion.) 4.3 Other issues and lessons that were covered in less detail in the PCR are discussed below, along with recommendations for improving implementation in the future.  21 Procurement 4.4 As with the previous two projects, procurement for the Karamay project started slowly, with the same problems of coordination among the three concerned entities, KOC, CNTIC, and MOPI. After three years of project implementation (end 1987) disbursement was only 41% of the appraisal estimate. Loan completion was delayed by two years. While the procurement coordination problem had been recognized shortly after the first two projects started to be implemented, little had been done to resolve the problem before this third project had been sent to the Board. The Government had promised that a coordination task force would be established by December 1984, but they had still not been organized by mid 1990. It might have been better to have focused early on this coordination problem and make it a condition of Board presentation or at least of disbursement. Lesson. The Bank should have insisted that these problems be resolved as a condition of moving forward with the Karamay project. Both the Bank and the GOC have learned from their experiences with these projects. The Shift to Heavy Oil Development 4.5 Conditions in KOC's oilfields changed rapidly during the implementation of the project. At the time of the Bank's first identification mission to Karamay, KOC was producing less than 40,000 tons of heavy oil per year, from a reserves estimated at that time of 1.2 billion tons. With the technology in use at that time, KOC was unable to establish an effective production program. In the hope that the use of modern technology would solve some of KOC's problems, MOPI requested that the Bank include a heavy oil component in the Karamay project. 4.6 The mission identified the most important reasons for KOC's lack of success in its previous attempts to recover heavy oil through steam injection ana encouraged KOC to expand it's heavy oil program. Solutions were suggested for many of KOC's technical problems, including those related to inadequate well completion and cementing techniques, untreated water that corroded the tubing, inadequate well spacing, and low quality steam boilers. However, the mission took the position that these solutions should be tested on a pilot basis, and some pilot programs should be undertaken to establish the data needed to design an optimum investment program before full field development was initiated. The Bank project supported the work needed for these pilot programs, with the idea that subsequent projects would support full field development if it proved economically viable. Progress, however, proved much faster than anticipated. 4.7 Within a year after project effectiveness, KOC had successfully developed a number of small scale heavy oil pilots and had decided to shift much of its attention to expanding heavy oil production. The shift was particularly timely in light of the lack of significant successes in the exploration program for light oil. Subsequently, the consultant firm hired by KOC for design of the special pilot studies was also employed, with Bank concurrence, to undertake the basic conceptual design for full field development and to review the technical parameters of this development. 4.8 The Bank worked closely with KOC to restructure the project to take advantage of new opportunities in the rapidly changing conditions in the oilfield. Funds were shifted from the light oil project component to support a greatly expanded program to drill delineation and development wells (an increase from the original 160 to a final 1,126) and a concomitant growth in surface facilities,  22 particularly steam generators, which increased from 4 to 40 (29 of which were eventually financed under the loan). 4.9 The program was highly successful: Production reached 1.5 million barrels by 1992, and benefits of increased production will continue well beyond the turn of the century. 4.10 Recommendation: However, the resulting project went well beyond the scope of the original project, and the changes were made without formal agreement by Bank Management or the Board. Majority changes of this nature should be formally reviewed by Bank management and approved by the Board. They do not always produce such positive results. Training 4.11 Seven drilling rig simulators were bought for the three training centers financed by the Bank (Daqing, Zhongyuan and Karamay), and all had the same problem with their computer hardware and software. 4.12 Recommendation: If the executing agency is unable to inspect the specialized equipment before it is shipped, contracts should call for inspection before shipping by an independent inspection agency. In this case such an inspection would have demonstrated that the design was incomplete and machine would not work. 4.13 While on-the-job training for the use of new equipment was quite effective, the overseas technical training program for engineers and managers got off to a very slow start, and did not train the number of people that it should have. By early 1989, four years after the project had started, only 15 people had been sent for training at foreign academic institutions, out of the 55 people planned. The training on heavy oil development was also cut short, with field training reduced by over 50% (29 to 14 man months) and technical training at the headquarters of the consultant reduced by 25%. In all cases the problem appeared to be the organization and implementation of foreign language training needed as a prerequisite. 4.14 Recommendation: Where foreign language training is needed, it should be included as a specific project component. Institutional arrangements need to be worked out for this training at appraisal or, at the latest, at negotiations, since learning a foreign language is always a time consuming process. Some of this training need to be done in the foreign country. This language training program should include training of management and business staff, in addition to technical staff, since technical staff rarely have time to translate materials when they return. 4.15 Conclusion: All of the training programs focused on the development of technical expertise in the fields of exploration and production. None were developed for the equally important area of modem management techniques for line managers and senior managers. 4.16 Recommendation: More attention should be paid to the training of managers, since this is where the modern attitudes towards operational efficiency can be most effectively introduced.  23 Technical Studies 4.17 For the Geological Study, the Bank failed to convince the implementing agency (KOC) to implement the original terms of reference for a broad-based study of the entire basin, which would provide wider benefits for all the petroleum enterprise operating in the region under the auspices of the Xinjiang Petroleum Administration. The approach of looking at only one small part of the basin limited its ability to determine the prospectiveness of the area and to prioritize regional exploration investment opportunities. Thus, the results of the study provided minimal benefits to KOC, limited primarily to a confirmation of their existing understanding of the basin's geology and potential in their area of operation. Nevertheless, KOC believed that it benefitted indirectly through thc training and transfer of know-how in terms of the consultant's research methodology, and its techniques for computerized data compilation for sophisticated geological maps. The study ran into a number of difficulties because the consultant company changed many of the study team during the study implementation. This change was made without the consent of the borrower, although the contract called for such consent to be received. 4.18 One of the most important aspects of the Reservoir Engineering Study was that the technology developed was used by KOC staff after the study was completed. They were able to do so because the computer work stations and the reservoir simulation model software that was used for the Wuerhe reservoir study were supplied by the consultant to KOC as part of the study package. Since KOC staff had been trained in the operation of the model through on-the-job training, while they worked with the consultants in the design and modification of the model to fit the Wuerhe reservoir, they were able to continue to update and optimize production programs as updated information was retrieved from newly drilled wells. 4.19 Equally importantly, they were able to use the technology to design optimal production programs for many of their other oilfields. Although the study was extremely important for KOC, it's initiation was delayed by over a year, primarily by protracted negotiations on details of responsibilities, coverage, and costing of deleted and added components. The negotiations did, in fact, lead to better contractual conditions for KOC in terms of breath of coverage and cost. However, KOC paid a high cost in terms of delays in implementation and confusion about the extent of the consultant's contractual obligations. This confusion was exacerbated by repeated KOC's requests during project implementation for the modification and extension of the consultant's work program. Many of these requests were acceded to, although few led to a substantially improved final product. As a result, the study took 40 months to complete instead of the contracted 18 months. 4.20 The Costing Study was highly successful in introducing modem management techniques for economic decision making both for day-to-day decision making and cost control and for longer term strategic investment decision making. The increased consciousness of the importance of financial analysis that these new techniques create has had an identifiable effect on how management makes operational decisions. For instance, the analysis techniques has been used to decide which heavy oil field development programs were economically justified and which were technically feasible but economically unjustified because of the excessively high costs. In addition, the study recommendations have been distributed to all the oil companies whose experts worked on the study.  24 4.21 The creation of a special group of experts from a wide range of local oil enterprises, instead of just from the executing agency (KOC) ensured that there would be an openness to outside information and cross fertilization of ideas. Bank support through detailed review of the final terms of reference with the technical group helped to assure that the study would focus on finding solutions for critical issues. Finally, sector wide participation made it easier to disseminate the recommendations to all sector institutions. 4.22 The Gas Utilization Study considered only the issues of gas production, and neglected the issues of gas utilization that are central to the establishment of priorities for maximizing the benefits from the use of the gas. The study therefore failed to meet the Bank's objectives for undertaking the study, which was to establish the basis for making a gas masterplan, or at least the basis for agreeing on meaningful economic priorities for its utilization. 4.23 Lesson: The implementing group was from the CNOOC, the entity that was responsible for overseeing the study's implementation. This arrangement created three problems. First the narrow institutional base of the study team made it more difficult to view issues from a broad national perspective. Second, CNOOC had difficulty implementing the gas utilization portion of the study, without appearing to undermine the authority of the Ministry of Petrochemical Industries. Third, lacking an arms length relationship with the study team, CNOOC, the responsible agency was less prepared to take a critical view of the study's weaknesses. 4.24 The Bank also failed to fill these gaps by undertake the critical review process or by insisting that a technical consultant be used to help with structuring the study and/or reviewing its progress. Supervision missions failed to review with CNOOC management and the study team the final Terms of Reference to ensure that it maintained its original focus, probably because these missions did not include the needed technical skills. Lessons Learned from Implementation of Studies 4.25 Changes in Terms of Reference (TOR) for consultant studies after they have been agreed with and approved by the Bank were, in many cases, detrimental to successful implementation of the study. If the study is on the project's critical time path, the TOR should to be confirmed by appraisal. It is important that all parties agree with the scope and direction of the study. The Bank should then make every effort to discourage borrowers from changing the TORs after bids have been received. Such efforts have led to long, drawn out negotiations with the successful bidder, to the detriment of project implementation timetables. Since such practices are contrary to the Bank's normal procurement practices, Bank staff should request to participate in negotiations to help both parties come to closure, when negotiations extend beyond the normally expected one or two weeks. 4.26 Studies were also delayed when borrowers suggested, and consultants agreed, to change the study scope in the course of its implementation. With hindsight, one can see that Bank staff should have carefully monitored any agreed changes in study scope and should have worked with both parties to ensure that unrealistic expectations on the part of the borrower did not push the consultant to promise more than could be delivered, with eventual inconclusive results.  25 4.27 The inclusion of the hardware and software to continue to carry out the reservoir simulation modeling allowed the implementing agency "to take possession, of' and " to own" the new technology. This ownership is a critical element in it adaptation and continued use. The alternative of just receiving a completed study with recommendations from a consultant has been shown, in other projects in China to be unsuccessful in having the new technology adopted into the ongoing operational procedures of the enterprise. Therefore, all studies that use computer modeling should include sufficient hardware and software to enable the implementing agency to continue the activity, either on its own, or, where appropriate, in conjunction with a local institution that specializes in this activity. 4.28 Financial accounting and costing studies can be successfully implemented by local groups, if these groups have access to the techniques used in more advanced countries. There are many advantages to implementing such studies with local groups, the most important of which may be that it establishes the internal "ownership" of the results which makes dissemination and adoption much more likely. 4.29 When gas utilization planning studies are considered important for improving the planning process for optimization of investment programs, the Bank needs to ensure the cooperation across agencies responsible for planning supply and utilization. Such a study is unlikely to be successful if only one of the concerned agencies is involved in its implementation. If a local group is to undertake the study it should be composed of a sufficiently wide range of participants to ensure access to data needed to cover both production and utilization data. There should be an arms length relationship between the study team and the executing agency. If Bank staff are unavailable for detailed supervision of studies undertaken by local groups, arrangements should be made to have an international expert review the study at critical junctures during its implementation. 5. PROJECT OUTCOME AND SUSTAINABILITY 5.1 The project was highly successful in meeting its development objectives of introducing modern oilfield technology, including management financial costing and control, and of assisting KOC to increase its oil production levels. It was less successful than expected at appraisal in increasing the production of light oils, but was much more successful than expected in increasing heavy oil production. Institutional development, particularly that related to financial management and controls also appears to have been significant. The benefits are likely to be sustainable in the future. 5.2 The project scope was substantially altered to meet the evolving oilfield conditions. The shift of emphasis to the development of heavy oil after it was learned that the potential for light oil was less than originally thought was appropriate. However, given the size of the shift in project scope, some more formal internal approvals should probably have been sought.  26 CONCLUSIONS FOR ALL THREE PETROLEUM DEVELOPMENT PROJECTS 1. The three projects of this Audit reflect the first stage of the development of Bank assistance to China's Petroleum Sector. They focused primarily on introducing modem technology, the training of staff at all levels in the use of this technology, and utilizing this technology to improve the productivity and safety of oilfield operations and to increase the volume of oil that could be produced from these fields. In these endeavors they were completely successful. New technology was successfully introduced, training centers were established to train staff in all aspects of modem oilfield operations, productivity was increased, and a great deal more oil was produced than would have been possible using the older, outdated technology previously available. 2. The results of the technical assistance and staff training must be ranked as the most important achievements of these three projects, in spite of the delay caused in the actual training program by the other delays in the procurement process and in overall project implementation. In this respect, the capabilities of all three operating companies and their contribution towards the petroleum industry in China have been significantly enhanced by the implementation of these projects. 3. A great many difficulties were encountered in procurement processing, many of which can be attributed to the cumbersome institutional arrangements that the Bank felt obliged to accept as a cost of rapidly expanding its lending program in a country with highly centralized decision making institutions. The projects were less successful in establishing institutional change in financial self reliance, and financial decision-making using modem management tools. 4. The projects were appraised without any significant sector review or sector policy dialogue. Recognizing that it would take considerable time to develop a successful policy dialogue on institutional and economic issues, the Bank accepted many constraints that might not have been accepted in countries where a dialogue had already been established over an extended period. By sidestepping sector policy issues, the Bank was able to assist in speeding up the rate of technical progress in the petroleum sector at a critical juncture in China's petroleum development efforts. The Audit believes that this flexible approach greatly enhanced the Bank's effectiveness in making an important impact on the sector. 5. There were, however, many sector issues where a policy dialogue might have helped sector performance. The project entities continued to suffer from the effects of operating in a highly centralized central planning environment. The most important of these constraints was the lack of independence of the executing agency. Petroleum enterprises were closely controlled by central govemment agencies: by MOPI/CNPC for their investment policies and by CNTIC for their foreign purchases. They were never expected to be efficient, profit maximizing entities, but were, instead, expected to meet specific quantitative output targets. Furthermore, prices were controlled, by the central government, and were never allowed to approximate international prices, while most operating profits were redistributed to the central authorities. 6. The possible usefulness of a policy dialogue on these issues in the early 1980s is, of course, questionable. China was not ready to make the structural policy changes that were needed to make each entity an independent efficiency oriented entity. However, China has been moving rapidly to a more  27 market oriented, decentralized economy, and the petroleum industry is likely to see significant structural reform in the next few years. The Bank has been working with the Government on evaluating altemative ways of restructuring the sector so as to increase the level of competition among the many operating entities, and to introduce further competition through expanding the role of foreign producers and service companies. 7. The Bank has done little in the way of basic sector studies that are an essential element for a future policy dialogue. The choice of the first projects was left to the Chinese authorities (MOPI), and there was no independent effort made to determine whether these projects were the most important ones for the sector as a whole. Given the time constraints, the size of the country, and the significance of the first three projects, this approach was a reasonable way to initiate a sector lending program. It was undoubtedly expected that knowledge of the sector would mature over time. Unfortunately, the Bank stopped virtually all oil sector work after the introduction of the OMS 3.82 in 1984, along with the elimination of projects to assist China upgrade its technical capabilities to develop other already discovered oil resources. The Region did undertake a sector policy review in 1990, but this review looked mostly at the institutional aspects of the sector. It has yet to undertake a review of all the country's major oil and gas operations, and is, therefore unable to discuss sector investment priorities with the petroleum authorities. Clearly, if the Bank intends to continue to be active in the energy sector, it needs to better understand sector priorities. Bank Lending for Oil Development in China 8. The Bank stopped virtually all oil sector work in China after the introduction of OMS 3.82 in 1984. The next two projects were for technical assistance. OMS 3.82 presents a reasonable approach to the development of petroleum resources in countries with limited petroleum activities. It also represents a reasonable approach to exploration programs, where the high risk nature of the undertaking makes it unsuitable for the use of borrowed funds, and where international companies have a clear comparative advantage in technology know-how. However it makes much less sense when applied to countries with a very large, established sector and with a massive petroleum production. In these limited number of cases, a substantial part of the established resources should and will continue to be developed by local enterprises, since it is unlikely that these operations can be effectively transferred to foreign joint ventures. It makes little sense in these cases to refuse to assist in the transfer of modern technology to these local operations. 9. In the former situation, the domestic industry may have no comparative advantage in building up and maintaining an international level of expertise. Government support for such industries may, therefore, be an inefficient and costly way of developing its national resources. In the latter situation, since the domestic industry in countries is already well established, the alternative of selling off oilfields that are under production to foreign joint ventures is unlikely to be a viable alternative.  28 ANNEX I CHINA NATIONAL PETROLEUM CORPORATION Telex 22312 PCPRC CN Liu pu Kang, Beijing, CHINA June 22, 1994 Dear Sirs, We have reviewed your draft Performance Audit Report (PAR), passed by MOF, for four World Bank financed projects in China's oil/gas sector.' As the coordinator of those projects, we would like, on behalf of China National Petroleum Corporation (CNPC), to give our comments as follows: 1) We highly appreciate the Auditor's significant and helpful work on those four projects. 2) We agree to the PAR's conclusion that implementation of all four projects are successful and satisfactory, although Weiyuan T.A. project only partially achieved its original targets. 3) We agree to most basic points of PAR and the lessons and recommendation given by the Auditors for project implementation, particularly to the analysis of implementation and procurement delay which was the common problem in all four projects. We have already taken some measures for the ongoing Sichuan gas project to avoid such delays since we have become aware of the significance of this problem. 4) Internal coordination among four Chinese agencies: We admit that inadequate interagency coordination and cumbersome internal clearance procedures did exist in the project implementation, but the approval procedure among the four agencies were not exactly like that expressed in PAR (See Zhong Yuan project 4.7-4.8). Signed by: Zhou Qingzu China National Petroleum Corporation Daqing Oilfield-Gaotaizi Reservoir Development Project (Loan 2231-CHA); Zhongyuan-Wenliu Petroleum Project (Loan 2252-CHA); Karamay Petroleum Project (Loan 2426-CHA); and Weiyuan Field Technical Assistance Project (Loan 2580-CHA).