Argentina - Refinery Conversion and Gas Utilization and Technical Assistance Projects

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 14794 PERFORMANCE AUDIT REPORT ARGENTINA REFINERY CONVERSION PROJECT (LOANS 2032-AR AND 2032-1-AR) AND GAS UTILIZATION AND TECHNICAL ASSISTANCE PROJECT (LOAN 2592-AR) JUNE 30, 1995 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. Acronyms and Abbreviations BANADE National Development Bank CNG Compressed Natural Gas EOR Enhanced Oil Recovery FCC Fluid Catalytic Cracking FCCU Fluid Catalytic Cracking Unit FMIP Financial Management Improvement Program Gde Gas del Estado GUTA Gas Utilization Assistance Project OED Operations Evaluation Department PAR Performance Audit Report PCR Project Completion Report PERAL Public Enterprise Adjustment Loan POIP Plant Operations Improvement Program YPF Yacimientos Petroliferos Fiscales Weights and Measures Metric System 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 June 30, 1995 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on Argentina Refinery Conversion Project (Loans 2032-AR and 2032-1-AR) and Gas Utilization and Technical Assistance Proiect (Loan 2592-AR) Attached is the Performance Audit Report (PAR) on the Argentina: Refinery Conversion project (Loan 2032-AR and Supplemental Loan 2032-1-AR, approved in FY82 and FY86, respectively) and the Gas Utilization and Technical Assistance-GUTA-Project (Loan 2592-AR, approved in FY85), prepared by the Operations Evaluation Department (OED). No comments were received from the Borrower. These two Bank projects implemented by Yacimientos Petroliferos Fiscales (YPF), Argentina's national oil company, were the third and fourth Bank-financed operations in the sector. They were carried out in the context of the country's mounting economic crisis of the mid- and late-eighties which caused funding shortfalls resulting in significant project delays and a steady deterioration of YPF's finances until 1989. The policies of the Menem administration implemented from 1990 onwards, and supported by the Bank under the Public Enterprise Adjustment Loan (PERAL, approved in FY91), resulted in a complete turnaround in the sector's performance and the ultimate successful privatization of YPF in 1993. The Refinery Conversion project aimed primarily at shifting production of low-value fuel oil to higher- value distillates, enhancing the efficiency of YPF's refineries, strengthening its finances, and improving petroleum products pricing. Although physical components were essentially carried out , albeit with substantial delays, their completion required additional Bank financing to offset insufficient local funding -- itself the result of inadequate Government pricing policies. The project components' ex-post economic rates of return, at -12.2 and 8.2 percent, are inadequate. And although some useful studies were carried out, key institutional objectives (i.e. to strengthen pricing and sector finances) had not been achieved by the time the loan was closed; overall institutional development is thus considered modest, as in the Project Completion Report (PCR). Project outcome is assessed as unsatisfactory (as in the PCR), as are Borrower and Bank performance over the project's implementation period (i.e. from 1981 to 1989). The GUTA project aimed primarily at substituting natural gas for petroleum products, expanding enhanced oil recovery operations, and strengthening YPF's finances. Implementation of the project suffered from the same unfavorable environment until 1989 and physical objectives were only partially achieved: some critical physical components (gas plant in Campo Duran and pipelines) were completed, albeit with significant delays, and show high ex-post economic rates of return; others (enhanced oil recovery subprojects and compressed natural gas pilot) were substantially reduced in scope for lack of funding. However, the technical assistance component, initially aimed at traditional institution-building, was redirected and substantially expanded in 1990 (three years before loan closing) at the request of the new Government, in order to support the articulation and implementation of its successful sector restructuring and privatization program. Accordingly, institutional development is assessed as substantial (as in the PCR). Project outcome as a whole is assessed as marginally satisfactory (as in the PCR), as are Borrower and Bank performance. Given the recent dramatic turnaround in sector performance brought about by deregulation and privatization and the fact that these reforms have taken root, the sustainability of both projects is considered likely. Attachment 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. 4 FOR OFFICIAL USE ONLY Contents Preface. .........3 Basic Data Sheets ...5....................5 Evaluation Summary .................................................... 9 1. Background ........................................................ 15 2. Refinery Conversion Project ...................... ................ 19 Objectives........................................................19 Scope, Concept and Design.............................................19 Agreements Under the Loan...........................................21 Implementation....................................................23 Results ..... .....................................................26 Sustainability.....................................................29 Bank Performance.................................................. 30 3. Gas Utilization and Technical Assistance Project ............................33 Objectives....................................................... 33 Scope, Concept and Design........................................... 33 Components...................................................... 34 Implementation .................................................................................. 37 Results ........................................................................................... 40 Sustainability .................................................................................... 41 Bank Performance ........................................... ....... 42 4. Conclusions and Lessons ..............................................45 Statistical Annex......................................................................................... 47 This report was prepared by Alain Barbu (Task Manager) and Bernard Decaux (Consultant) who audited the project in February 1995. Lorna Sibblies and Charles Strout provided administrative support. This document has a restricted distribution and may be used by recipients only in the perforrmance of their Iofficial duties. Its contents may not otherwise be disclosed wiL.hout World Bank authorization.  3 Preface This is a Performance Audit Report (PAR) on three loans to Yacimientos Petroliferos Fiscales (YPF) for the Refinery Conversion Project (Loans 2032-AR and 2032-1-AR) and the Gas Utilization and Technical Assistance Project-GUTA (Loan 2592-AR). Loan 2032-AR for US$200 million was approved on July 7, 1981 and Supplemental Loan 2032-1-AR for US$116 million was approved on May 20, 1986. Both loans were closed on December 31, 1989, four years and two years behind schedule respectively, and an undisbursed amount of US$0.2 million was canceled. Loan 2592-AR was approved on June 25, 1985. Co-financing was provided by the IDB (US$59.5 million) and Japan Eximbank (US$187.3 million). The loan was closed on December 31, 1993, two years behind schedule and an undisbursed amount of US$14.6 million was canceled. The loan was fully prepaid by YPF. The PAR was prepared by the Operations Evaluation Department (OED) and was based on two Project Completion Reports (PCRs) prepared by the Latin America and the Caribbean Regional Office, the respective SARs, President's Reports, loan documents and projects files, as well as discussions with Bank staff and Argentinean officials. This PAR deepens the evaluation of the two projects beyond the analysis provided in the respective PCRs in two main respects: it updates the project economic analysis based on more recent price information; and it provides a more detailed-and more critical-assessment of Bank performance, placing these two operations within the overall framework of the Bank's lending strategy to the hydrocarbon sector between 1981 and 1993. Prior to preparing this PAR, an OED mission visited Argentina in February - March 1995. Following standard procedures, OED invited Borrower comments on the draft PAR. No comments were received. 1. Report # 11608, dated February 1, 1993 and Draft PCR Report dated May 27, 1994.  5 Basic Data Sheet Argentina - Refinery Conversion Project (Loans 2032-AR and 2032-1-AR) Loan Position (Amounts in US$ million) Loan Original Disbursed Canceled Repaid Outstanding 2032/2032-1-AR 316.0 316.0 --- 316.0 0.00 Cumulative Estimated and Actual Disbursements (US$ million) IBRD Fiscal Year 1982 1983 1984 1985 1986 1987 1988 1989 Original Loan Appraisal Estimates 14.0 60.0 160.0 200.0 --- - --- -- Revised Estimate --- --- --- 157.1 189.1 200.0 --- --- Actual 18.1 37.6 99.1 184.9 198.8 197.1 197.1 200.0 Actual as % of Est. 128.0 62.0 62.0 118.0 105.0 98.0 98.0 100.0 Date of Final Disbursement: 05/29/90 Supplemental Loan Appraisal Estimate --- --- --- --- 11.44 61.26 97.96 116.00 Revised Estimate --- --- --- --- --- --- --- --- Actual --- --- --- --- 0.00 68.63 110.38 116.00 Actual as % of Estimate --- --- --- --- --- 112.00 112.00 100.00 Date of Final Disbursement: 05/29/90 Project Dates Date Planned Date Revised Date Actual Original Loan Identification 1/23/80 Preparation 3/12/80 Appraisal Mission 10/13/80 Loan Negotiations 2/2/81 5/17/81 Board Approval 7/7/81 Loan Signature 10/2/81 Loan Effectiveness 1/5/82 2/5/82 Loan Closing 12/31/85 12/31/86 12/31/89 Project Completion 12/31/90 Supplemental Loan Loan Negotiations 3/17/86 Board Approval 5/1/86 5/20/86 Loan Signature 5/22/86 Loan Effectiveness 5/22/86 Loan Closing 12/31/87 12/31/88 12/31/89 Project Completion 12/31/90 6 Staff Inputs (in staff weeks) Stage of Project Cycle and FY Actual Through ,'ppraisal 34.34 Appraisal Through Board Approval 52.91 Board Approval Through Effectiveness 15.26 Supervision 134.94 Total 237.45 Mission Data Stage of Project Cycle Date No. of Persons Specialization Represented Original Loan Preparation 3/80 3 ENG, FA, DIV Preparation 6/80 2 ENG, FA Appraisal 10/80 4 ENG, FA Appraisal 10/80 2 DIV, L-OFF Appraisal 11/80 1 ENG Negotiations 05/81 3 DIV, L-OFF, LEG Supervision 12/81 2 FA, ENG Supervision 8/82 2 FA, ENG Supervision 11/82 1 FA Supervision 2/83 1 FA Supervision 6/83 2 FA, ENG Supervision 10/83 1 ENG Supervision 3/84 1 FA Supervision 6/85 3 Supplemental Loan Supervision 11/85 3 FA, ENG, ECON Supervision 5/87 2 FA, ENG Supervision 12/87 2 ENG, ENG Supervision 4/88 3 ENG, FA Supervision 10/88 4 ENG, FA Supervision 11/89 1 ENG Supervision 4/90 2 ENG, ENG FA = Financial Analyst; ENG Engineer; ECON Economist; DIV = Division Staff; L-OFF = Loan Officer; LEG = Lawyer; P-EGR = Petroleum Engineer 7 Basic Data Sheet Gas Utilization and Technical Assistance Project (Loan 2592-AR) Loan Position (Amounts in USS million) Loan Original Disbursed Canceled Repaid Outstanding 2592-AR 180.0 165.4 14.6 ? 0.00 Cumulative Estimated and Actual Disbursements (US$ million) IBRD Fiscal Year 1986 1987 1988 1989 1990 1991 1992 1993a 19940 Appraisal Estimates 25.0 80.0 130.0 180.0 180.0 180.0 180.0 180.0 180.0 Revised Estimate 16.7 75.6 135.0 176.6 180.0 180.0 180.0 180.0 180.0 Actual 0.0 10.7 15.3 41.0 76.5 100.0 137.9 169.9 165.4 Actual as % of Est. 0.0 12.8 10.2 20.9 38.2 50.0 68.9 85.0 82.7 Date of Final Disbursement: May 25, 1993 Sources: Estimated disbursements from Staff Appraisal Report (SAR) and other disbursements from MIS data as of 12/31/93. a. Formally revised closing date was 12.3313.93. b. US$4.52 million was reimbursed during the first quarter of 1994. Project Dates Date Planned Date Actual Identification --- 10/01/81 Preparation 07/01/84 01/25/85a Appraisal Mission 11/01/84 11/12/85 Loan Negotiations 05/17/85 5/17-24/85 Board Approval 6/25/85 06/25/85b Loan Signature --- 5/22/86 Loan Effectiveness 10/03/85 09/30/86 Loan Closing 12/31/91 12/31/93 Project Completion 12/31/91 1Y/31/93 Staff Inputs Stage of the Project Cycle Actual Identification to Appraisal 214.5 Appraisal to Board Approvala n/a Board Approval to Effectivenessa n/a Supervisionb 221.5 Total 436.0 Sources: MIS and forms 590. a. Breakdown was not available from MIS. The value is included in "Identification to Appraisal." b. Eight staff weeks were added in FY94 for the PCR 8 Mission Data Stage of Project Cycle Date No. of Persons Specialization Represented Through Board Approval Preparation 11/82 n/a n/a Preparation 12/83 n/a n/a Appraisal 11-12/84 7 ENG, ECON, FA Supervision Supervision 5/87 2 n/a Supervision 11-12/87 4 n/a Supervision 5/88 1 ENG Supervision 8-9/88 5 ENG, FA Supervision 11/88 3 ENG, FA Supervision 11-12/89 2 ENG, FA Supervision 4-5/90 3 P-ENG, FA Supervision 5/91 1 FA Supervision 8/91 1 FA Supervision 10-11/91 1 P-ENG Supervision 3/92 1 P-ENG Supervision 6/92 1 FA FA = Financial Analyst; ENG = Engineer; ECON = Economist; DIV = Division Staff; L-OFF = Loan Officer; LEG = Lawyer; P-EGR = Petroleum Engineer Sources: Forms 590 and Bank memoranda. Related Bank Loans (US$ millions) Year of Amount Amount Loan # Title Approval ofLoan Disbursed Status Comment 1880-AR Oil and Gas 1980 27 24.92 Fully Seismic survey and oil reserves Engineering Disbursed appraisal of existing reservoirs. (FD) Borrower: YPF 2031-AR Oil and Gas Credit 1981 100 76.86 FD On-lending to private firms operating in energy sector. Borrower: BANADE (National Development Bank). 3416-AR Hydrocarbon 1991 28 9.47 FD Loan was prepaid by YPF Engineering ($19m Project canceled) 9 Evaluation Summary Background 1. Since the 1920's, both the upstream and downstream segments of the Argentine oil and gas industry had been monopolized or controlled by the Government. Until the mid 1970's the latter was reluctant to open the hydrocarbon sector because the Government owned oil company, YPF, had maintained an independent role and because the sector had been considered too sensitive to allow outside involvement. However faced with declining oil output in 1975-76, the new administration which took office in 1976 started with a program to revamp YPF and the Gas Company (GdE) and to redefine the ground rules for private participation in the sector. 2. By the late 1970's, improvements, while encouraging, were far from complete, and YPF sought assistance from the Bank to assist in the process. Financing of the Argentine energy sector fitted well with the emerging Bank's policy in energy. Argentina was considered to be the right country in size, in the nature of its oil and gas operations, in its market requirements and in its resource availability (natural gas and oil) to make an ideal candidate for Bank financed projects under its new energy policy. 3. Having opted to assist Argentina's oil and gas sector through a relatively large involvement, the Bank made four loans between 1980 and 1985: (a) an oil and gas engineering loan of $27 million to YPF, approved in 1980; (b) a second (financial intermediary) loan of $100 million to BANADE, a development bank, providing financing for domestic private oil companies, approved in 1981; (c) a third loan of $200 million, to YPF, for a refinery conversion project, also approved in 1981; and (d) a fourth loan of $180 million, also to YPF for the optimization of gas utilization and the elimination of bottlenecks in infrastructure, approved in 1985. 4. This audit deals with the last two loans, for the Refinery Conversion and the Gas Utilization and Technical Assistance Projects. Refinery Conversion Project Objectives 5. The objectives of this project were to convert Argentine's substantial surplus low-value added residual fuel oil to higher value refinery products in short supply, to improve the performance of YPF's major refineries (La Plata and Lujan de Cuyo), to strengthen the 10 company's financial management and pricing system, and to study the potential for energy saving in the industrial sector. Scope and Design 6. The main component of this $878 million project was a Refinery Conversion Scheme ($823 million). The scheme was designed to process almost all of the reduced crude into feedstocks for subsequent conversion and into light or middle distillates as well as coke in coking in fluid catalytic cracking plants. With an expected 95 percent capacity utilization in each of the two refineries, oil products production (excluding fuel oil) was to be increased by 3.8 million tons and fuel oil production reduced by 4.2 million tons. 7. Other components included energy savings and pollution control programs, improvement in YPF's financial management, training and an industrial energy conservation audit. Implementation 8. The Conversion Scheme was considerably delayed (by four years). Also, YPF's financial situation deteriorated severely due to the country's general macro-economic situation, the failure of the Government to raise oil prices as agreed and YPF's generally poor management performance. YPF proved unable to secure the planned foreign commercial borrowings. In order to avoid halting ongoing construction on the Conversion Scheme, the Bank was requested, and agreed, to provide a $116 million supplemental loan in 1986. The Japanese Eximbank also agreed to make a second loan of $186 million in 1986 to offset insufficient local funding for the project by YPF and the Government. 9. Technical assistance in the areas of accounting, organization and information systems was only partially carried out, whereas the industrial energy audit was not implemented. Results 10. The project's main objective to increase higher value light/distillate production was partially met: light/distillate output rose by 2.6 million tons and fuel oil output fell by 1.8 million tons. Tonnages were less than planned due to stagnating demand for petroleum products and lower than expected capacity utilization. (77 percent on average for each refinery instead of 95 percent as anticipated). Pollution control investments at the La Plata refinery were carried out, although with considerable delays, but a pollution control study originally included in the project was canceled at YPF's request. 11. The recalculated economic rate of return for La Plata refinery was negative (- 12.2 percent) and for the Lujan de Cuyo refinery, it was only 8.2 percent. 12. YPF continued to show losses which amounted to $842 million in 1989, the project completion year. Part of YPF's losses stemmed from the Government's failure to maintain adequate ex-refinery prices of YPF's products. The loan ended up financing equipment for a Refinery Conversion Scheme without having any significant impact on much needed restructuring of YPF. 11 Sustainability and Institutional Impact 13. The technical sustainability of the Refinery Conversion project is considered assured in light of the continuous safe and efficient operation of the refineries. Financial sustainability is also considered likely following YPF's major restructuring in 1991 and its subsequent privatization in 1993. Net profits amounted to $706 million in 1993 and about $500 million in 1994. (Sustainability was assessed as uncertain in the PCR).2 14. Although sustainability is likely, the institutional impact of the Refinery Project can only be assessed as modest (as in the PCR), since major improvements have only taken place after the project was completed. Bank and Borrower Performance 15. The Bank played a positive technical role in following up closely the construction and procurement schedules of implementation. But its performance in evaluating and supervising YPF's financial performance was deficient. Faced with a lack of Government commitment on much needed restructuring reforms, and YPF's lack of cooperation on these aspects, Bank staff concentrated, by default, almost exclusively on technical implementation of the Conversion Scheme at YPF's two refineries. In light of the lack of institutional progress during the project implementation period, i.e. through 1989, Borrower performance under the Refinery Conversion project is also considered to have been deficient. Gas Utilization and Technical Assistance Project Objectives 16. The project's objectives were to substitute natural gas for petroleum products, to expand the use of enhanced oil recovery operations, to improve YPF's financial situation, and to strengthen energy planning capabilities. Scope and Design 17. The five major components were: (a) production of gas and associated liquids in Campo Duran, near the Bolivian border; (b) oil and gas fields debottlenecking and Enhanced Oil Recovery (EOR) sub- projects; (c) completion of crude and product pipelines to and from the Lujan de Cuyo refinery; (d) compressed natural gas (CNG) development; and 2. Ath the time the PCR was issued, YPF's privatization was still in the planning stage. 12 (e) institutional improvements (in the area of organization and information systems for YPF, and in energy sector planning for the Government). 18. Total project cost was estimated at $803 million of which the Bank was to contribute $180 million, IDB $60 million and YPF $563 million. More than half of project costs were devoted to Campo Duran facilities ($440 million). Implementation 19. The loan was closed two years later than anticipated. The Campo Duran installations were completed as well as the Lujan de Cuyo pipelines. However funds available for debottlenecking of oil and gas fields were diverted to finance urgent replacement of refinery components. Similarly, EOR and CNG subprojects were only partially implemented. 20. In contrast with the Refinery Conversion project, technical assistance funds were not only fully used for the intended purpose (YPF's organization and information systems) but were vastly expanded to finance experts and studies needed to carry out successive YPF and GdE restructuring and privatization programs in 1991-1993. 21. Due to its extremely difficult financial situation until 1991, YPF was unable to fully finance its expected share of the project cost and the resulting gap had to be filled by a Japanese Eximbank loan of $176 million. Results 22. The largest component (Campo Duran facilities) has proved economically justified although the recalculated ERR was lower than expected due to lower liquid output (ethane) and lower natural gas processed (25 percent vs. 37 percent estimated at appraisal). 23. Other subcomponents such as the Lujan de Cuyo pipelines and a large platforming unit to increase octane ratio also appear to be profitable. 24. The dialogue between the Bank and YPF/Government on institutional issues produced mixed results. During the period 1985-1989, institutional improvements were quite limited. It can thus be said that institutional impact of the GUTA itself was only modest. The original limited institutional objectives of the GUTA became moot in 1990-93 when an entirely new, and much more radical, approach to sector reform (i.e. outright privatization of YPF and GdE) was chosen by the Government and endorsed and supported by the Bank under the PERAL (approved in 1991). Sustainability and Institutional Development 25. The technical and economic sustainability of the Campo Duran facilities, and of the pipeline network and refinery improvements is considered fully ensured in the current deregulated and competitive sector environment. YPF's management and financial situation has vastly improved. It seems very unlikely that institutional changes which led to such improvements will be seriously jeopardized in the years ahead. (Sustainability was also assessed as likely in the PCR.) 13 26. Bank staff proved more aware of institutional and financial issues than under the Refinery Conversion project, and a number of useful sector studies were carried out. However, YPF's finances remained weak throughout most of the project implementation period. Nonetheless, considering that the redesigned technical assistance component contributed significantly to the Government's articulation and implementation of its drastic and successful reform of the sector, institutional development is assessed as substantial (as in the PCR). Bank and Borrower Performance 27. Bank staff contribution proved very useful on technical (construction and procurement) aspects. However there was little financial supervision until the end of 1988. Subsequently, financial supervision was facilitated by progress achieved by YPF in its accounting systems and organization. 28. Bank performance was characterized by a limited ability to bring about the drastic changes needed in the sector via the leverage of the GUTA alone, until the time came when the Government decided, of its own accord, to drastically alter its policies and to privatize YPF and GdE. Accordingly, Bank performance under the GUTA is considered as only marginally satisfactory, as is Borrower performance. Conclusions and Lessons 29. The outcome of the Refinery Conversion Project is considered unsatisfactory (as in the PCR) due to the low ERRs of its physical components and to poor results achieved regarding YPF's financial and institutional performance during the project implementation period. The outcome of the GUTA project is assessed as marginally satisfactory (satisfactory in the PCR), partly because of the higher ERRs of the physical components and partly because the loan provided ample funds for experts and studies to bring about a deeper restructuring of the company approach. But such restructuring was not part of the GUTA's relatively limited institutional objectives; it resulted from a basic shift in the Government's approach to public enterprises management and ownership. Without such a radical shift, the GUTA loan by itself would most likely have failed in bringing about the expected institutional improvements in YPF. 30. The experience of Bank investment lending to YPF shows that isolated attempts at improving enterprise performance stood little chance of success because of distortions in the corporate environment. Reforming YPF required a more frontal strategy to cause profound changes in contractual relationships with the Government, labor unions and YPF customers and suppliers. The main lesson of these two investment projects is that Government policies had to be changed in order to effectively deal with the sector's basic issues of control, regulation and interference. 31. The experience of these two projects also points to the importance of: (i) a strong political will to proceed with economically based and justified proposals (e.g. price and trade deregulation, etc.); (ii) maintaining a constant dialogue with vested interest groups (which often opposed implementation of project's conditionalities); 14 (iii) an appropriate legal and regulatory framework largely free from interference from above interest groups; and (iv) qualified and competent managers, supported by adequate financial and consultancy resources (such as those financed through GUTA technical assistance funds). 15 1. Background 1.1 From the 1920's to 1990, both the upstream and downstream segments of the Argentine oil and gas industry were effectively monopolized or controlled by the Argentine Government. The degree of participation by private sector companies acting as contractors in exploration and production fluctuated during this period, but no new concessions were granted. From 1910 to 1950, the Argentine Government conducted its oil and gas exploration and production through state agencies. In 1950, Empresa Nacional de Energia, a state-owned company, was formed to conduct all energy-related activities of the Argentine Government. In 1955, Yacimientos Petroliferos Fiscales Empresa del Estado (later Yacimientos Petroliferos Fiscales Sociedad del Estado), assumed the oil and gas exploration and production activities of Empresa Nacional de Energia. In 1958, Argentine ownership of hydrocarbon reserves was established and the grant of additional concessions was prohibited, although the rights of holders of an immaterial number of concessions granted prior to 1935 were not affected. 1.2 The hydrocarbon law enacted in June 1967 established the basic legal framework for regulation of oil and gas exploration and production in Argentina. The law empowered the Government to establish a national policy for development of Argentina's hydrocarbon reserves, with the principal purpose of satisfying domestic demand. YPF was permitted to conduct exploration and development activities in areas assigned to it as the primary agent of the national hydrocarbon policy, either on its own behalf or through service contracts or joint ventures entered into with third parties. 1.3 Although the law permitted Government to grant exploration permits and production concessions to private parties, prior to 1990 no such permits or concessions were granted thereunder and virtually all exploration and production in Argentina were carried out by or on behalf of YPF. Starting from 1967, however, an increasing amount of oil and gas was produced by certain private companies operating under service contracts with YPF. These contracts provided for payment by the Company of agreed-upon prices for oil and gas produced on its behalf by such companies. In addition, pursuant to several plans adopted by the Government beginning in 1978, YPF entered into exploration ("risk") contracts with private companies, under which such companies conducted exploration activities and, if marketable quantities of oil or gas were discovered, produced such oil and gas, all on YPF's behalf. 1.4 From 1967 on, the Government set official prices for crude oil, natural gas and refined petroleum products at levels that were generally lower than the prices of comparable imported products. Also in 1967, the Government granted Gas del Estado (GdE), the state enterprise engaged in transportation and distribution of natural gas, a preferential right to purchase natural gas produced in Argentina at prices to be agreed upon by GdE and YPF. 1.5 Until the mid 1970's the Government had been reluctant to open the hydrocarbon sector because YPF had maintained an independent role and because the sector had been considered too sensitive to allow outside involvement. However, faced with declining oil output in 1975-76 and stagnating natural gas production, the new administration which took office in 1976 started a program to revamp YPF and GdE and to redefine the ground rules for private participation in the sector. 16 1.6 In 1977, YPF was changed into a State company under the Law of State Corporations, thereby increasing its operational autonomy. While the Secretariat of Fuels retained control over pricing and investments decisions, in other areas YPF was given greater autonomy. The company was set to embark in a management, administrative and financial modernization program. 1.7 By the late 1970's, improvements, while encouraging, were far from complete, and YPF sought assistance from institutions like the Bank, as well as reputable international consulting firms, to assist in the process. Moreover, the Government, concerned about general inefficiencies in energy production and use, asked for Bank investment in such as areas as energy planning, conservation and optimization of hydrocarbon resources. These developments opened the door for the Bank to play a substantive role in helping Argentina rationalize its energy program. 1.8 Financing of the Argentine energy sector fitted very well with the emerging Bank's policy in energy (a new Energy Department had just been set up in the Bank). Argentina was considered to be the right country in size, in the nature of its oil and gas operations, in its market requirements and in its resource availability (natural gas and oil) to make an ideal candidate for Bank financed projects under its new energy policy. Furthermore, the Government had expressed a strong interest in Bank financing of projects in order to enhance its ability to steer and monitor one of the major public companies in the country, i.e. YPF. The Government seemed to believe that Bank participation would assist in strengthening financial and operational discipline in YPF. 1.9 Four principal issues affected sector development : (i) the inadequacy of energy planning, particularly regarding natural gas, the latter being considered a key factor to Argentina's energy future ; (ii) the inappropriate pricing of energy resources; (iii) the need to increase the role of private firms to improve sector efficiency; and (iv) the need to improve the efficiency ofYPF as a public sector institution and to provide it with foreign exchange resources, the lack of which had been a major constraint to the implementation of its investment program. 1.10 Having opted to assist Argentina's oil and gas sector through a relatively large involvement, the Bank financed four operations: (1) An oil and gas engineering project, for which a $27 million loan was approved in 1980. This project was expected to give rise to a number of other projects with YPF and GdE, including exploration/development, gas recycling, secondary recovery, and oil and gas transport infrastructure, which could be considered for future Bank financing. Assistance in overall energy planning was provided through studies addressing specific subsectoral issues to help assemble the building blocks necessary for an integrated energy plan. The preparation of the project helped to initiate a dialogue with the Government on the pricing of oil and gas. (2) A second loan approved in July 1981 for US $100 million provided financing for domestic private sector oil companies through the National Development Bank (BANADE). (3) A third loan, also approved in July 1981, for US $200 million to finance a refinery conversion project, which, together with the above mentioned oil and gas 17 engineering project, was to allow to tackle YPF's two main areas of activity, namely, oil exploration and production on the one hand, and refining and marketing on the other hand. The refinery project was also attempting to deal with pricing, energy conservation and institutional building aspects. (4) A fourth loan (Gas Utilization and Technical assistance Project) approved in June 1985 for US $180 million aimed at optimizing oil and gas production and at eliminating bottlenecks in infrastructure. Through this fourth loan, the Bank attempted to pursue the dialogue started with Government and YPF in the late seventies. The difficulties encountered by Argentina during the early 1980s had left YPF in a state of financial disarray and had hampered the implementation of projects financed in 1980 and 1981. The 1985 loan was also approved with a view to support a newly elected civilian Government to formulate new policies in the energy sector. Such policies included pricing, improved use of natural gas resources, and increasing participation of the private sector in this critical sector. In other words, the policy pursued in the 1980s was to aim at more efficient development of the hydrocarbon sector through YPF restructuring and continued policy dialogue with the Argentine Government.  19 2. The Refinery Conversion Project Objectives 2.1 The primary objectives of the Project were to convert Argentina's substantial surplus low-value added residual fuel oil to higher-value refinery products in short supply, improve the performance of YPF's major refineries, strengthen the company's financial management and pricing system, train YPF operational staff, and study the potential for energy saving in the industrial sector. 2.2 The financial management and national pricing of hydrocarbons objectives were expected to be difficult to implement. Some resistance was expected from YPF on agreeing to institutional changes that would fall outside the framework of the Refinery Conversion project, particularly on proposals for widespread changes in YPF's financial management. Also, the Government was expected to resist any price covenants specifying in numerical terms the price levels for hydrocarbon products. 2.3 YPF's senior management was eager to bring structural changes and liked the company to be run on a commercial basis. At the same time, politically powerful groups in YPF were sensitive to radical change. The Ministry of Economy also wanted YPF's efficiency improved but was reluctant to permit increases in YPF's revenues and was effectively limiting the company's ability to expand oil and gas exploration and development. While the Ministry wanted and needed participation of the Bank in making YPF's operations more transparent and in putting pressure on the management to increase efficiency, it was weighing whether it could agree to Bank conditions regarding new hydrocarbon pricing policies. The military was reluctant to lose its influence on YPF; and was skeptical of the Ministry of Economy's strategy to transfer some of YPF's functions to the private sector should YPF have not been able to improve efficiency. 2.4 In discussions leading up to and through appraisal, Bank staff had however made the Government and YPF aware of the Bank's institutional and policy perspectives as the major justification for its lending. The loan had been presented to YPF and the Government as part of a program of assistance to the energy sector, beginning with the Oil and Gas Engineering Project and extending to future loans for exploration and development. Scope, Concept and Design Refinery Conversion Scheme 2.5 The surplus fuel oil was to be converted at two YPF refineries -one at La Plata, near Buenos Aires, and the other at Lujan de Cuyo, 1,000 km from Buenos Aires- into light middle distillates (e.g. gasoline, gas oil, diesel oil) to redress the imbalance in the product slate of the refineries. In 1980, Argentina was faced with the paradox of exporting surplus fuel oil while importing middle distillates to make up the shortages and meet the increasing transportation, industrial and household uses, thus reducing the large quantities of natural gas being flared. 20 2.6 The Conversion Scheme was designed to process almost all of the reduced crude3 into feedstocks for subsequent conversion into light or middle distillates as well as coke in proposed coking and fluid catalytic cracking (FCC) plants. The project was assumed to start commercial operations on June 1, 1985 with a production build-up of 60 percent, 80 percent and 95 percent of capacity for the first, second and third operating years, respectively. At 95 percent capacity utilization in each of the two refineries, petroleum products production (excluding fuel oil) was to be increased by 3.8 million tons. At the same time, fuel oil production was to be reduced by about 4.2 million tonss Plant Operations Improvement Program (POIP) 2.7 The project included implementation by YPF of an operation improvement program for the existing La Plata and Lujan de Cuyo refineries with particular attention to energy savings and pollution control. 2.8 Energy conservation at both refineries aimed at reducing the process furnaces fuel consumption by recovering heat from flue gases to preheat the combustion air (air preheaters were to be installed). At Lujan de Cuyo, a waste heat boiler at the fluid catalytic cracking unit (FCCU) was to enable heat recovery from regenerator flue gas for the production of 28 tons per hour of steam. 2.9 La Plata refinery had very severe pollution problems. One objective was to put the effluent disposal system in a position close to complying with regulations on the subject. New facilities were to aim at reducing both hydrocarbons and solids content in liquid effluent to a low level (a dissolved air flotation unit was to be installed). 2.10 In addition at La Plata, the project covered the first stage for treatment of industrial water contaminated with chemicals. It aimed to have water effluents complying with regulations. 2.11 Several production process improvements were included in the POIP. They included: (a) replacement of coke unit compressor at La Plata: by this project new and higher capacity was to be installed to compress gas from the coke unit. New compressors were to allow for a higher LPG recovery from gas being flared. The project would also permit a reduction in maintenance cost. (b) FCCU revamping ac La Plata: new technology was to be incorporated into the FCCU in order to increase the on-stream factor and valuable product yields. (c) Coke unit fractionator zone revamping : this project was intended to debottleneck this section of the coke unit after the incorporation of a new coke module. 3. i.e. a crude fraction obtained after initial distillation of crude petroleum and which can be subjected to vacuum flashing and vacuum distillation. 4. Gasoline, kerosene, diesel/fuel oil, refinery gas, LPG and coke. 5. Fuel oil was to be used as a raw material (about 2.5 million tons per year for La Plata and 1,7 million tpy for Lujan de Cuyo) while refinery gas would replace fuel oil in utilities. 21 2.12 The fourth subcomponent was related to modernization of instruments. It consisted in installing an in-line process analyzer at La Plata with the aim to provide a control tool for optimizing yield of high-value products. 2.13 Finally, thefifth subcomponent included optimization of process units at both refineries with the help of mathematical models aiming at providing a tool to determine the optimum operating conditions for whatever feed and for the desired product specifications. Financial Management Improvement Program (FMIF) 2.14 This program was based on the recommendations of a US management accounting firm with respect to the establishment of cost centers, management information system, cost control systems and capital budgeting and financial planning. The work of the Consultant was to transform YPF's accounting system completely from the previous Government budgetary system to a financial accounting more suited for the changed status of YPF from a Government department to semi-autonomous industrial enterprise. Priority was to be given to cost accounting and management information systems. Subsequently YPF was to introduce long-term capital budgeting and financial planning. Training Program 2.15 The US Consultant was also to organize under the direction of YPF training manager training for YPF personnel to improve the overall financial management of the Company. Personnel was to be trained for industrial management positions in categories of managers, assistant managers and administrators. Industrial Energy Conservation Audit 2.16 This component had been actively promoted by Bank staff responsible for the project6. Government had apparently become convinced and supported the inclusion in the project. Energy Conservation measures had been included under the POIP for the two refineries (see above). The Industrial Audit had the objective of establishing a national industrial energy conservation center, to be achieved through pilot audits of selected industrial units in large-and- medium scale enterprises and training of personnel who would subsequently carry out audits of other production units. This component was to be carried out by the Energy Secretariat, under the Ministry of Public Works. However, the energy conservation component did not provide for the development of an energy conservation policy, formulation of regulatory framework nor an incentive mechanism for energy savings. Agreements Under the Loan 2.17 Agreements were reached with the Government and YPF regarding pipeline infrastructure, crude oil supply to the refineries, marketing of oil products, finance and pricing.7 6. Although some staff had questioned its rationale, arguing that it could be carried by the Argentines themselves since the necessary expertise was probably available in the country. 7. As indicated above, agreement had been reached that both refineries (particularly La Plata, which had an effluent problem) would meet satisfactory environmental standards. 22 Pipeline Infrastructure 2.18 While La Plata was not expected to lack crude oil supply, the Lujan de Cuyo Refinery was not receiving enough crude oil due to the depletion of oil fields in Mendoza area. It was thus decided to build a 560 km pipeline at a cost of $120 million to reach the Neuquen region where low sulfur, high quality crude existed. Agreement was reached with the Government and YPF that the pipeline would be constructed (by YPF) in time for the proposed conversion facilities at Lujan de Cuyo. 2.19 As the supply of refined products from Lujan de Cuyo was to increase substantially, additional pumping stations had to be established on existing product pipelines from Lujan de Cuyo to Buenos Aires area. These investments were not included in the Refinery Project but agreement was reached that sufficient product pipeline capacity from Lujan de Cuyo to Buenos Aires area would be put in place in time for the Conversion scheme. Crude Supply to the Refineries 2.20 Although oil reserves in 1980 were sufficient to meet the needs of existing refineries at 90 percent production for 12 years, agreement was reached that adequate arrangements were to be made to meet crude requirements of La Plata and Lujan de Cuyo refineries. Marketing 2.21 YPF had prepared a preliminary marketing plan for 1980-85 which included closing of uneconomic stations in areas where sales were low; increasing the share of profitable products (e.g. jet fuel) at the expense of unprofitable products (e.g. asphalt, etc.). Agreement was reached with YPF to carry out the plan by June 30, 1985. Finance and Pricing 2.22 In 1980, only 10 percent of YPF's investment requirements were financed from self- generated funds from operations. The rest of the financing was derived from decrease in working capital. Crude and product prices were not adequate to enable YPF to earn a reasonable return on its assets which could then be channeled for reinvestment. Agreement was reached with the Government that it would take measures to ensure that the ex-refinery prices of YPF's products would be adequate to provide YPF with funds sufficient to cover costs before interest, to earn a "reasonable" return on its revalued fixed assets in service, and to meet sound financial ratios, as follows: 2.23 The ability of YPF to generate cash to finance large new investments in oil exploration and production was limited, particularly because of inadequate crude oil prices. An "understanding" was reached with the Government that domestic oil prices paid to YPF would be raised to levels comparable to those paid to private oil companies under risk sharing contracts negotiated by the Government in 1980 and that domestic price of refined products would be maintained, in real terms at May 1, 1981 levels. 2.24 As the end of 1980, the quick ratio of YPF was 0.7:1. With this ratio, the Company was able to function because of its practice of collecting sales and related taxes and using them as 23 working capital for about five weeks before paying them to the Government. Agreement was reached that YPF would maintain at all times a quick ratio of at least 0.6 to 1. 2.25 Further, the following agreements were reached: (a) YPF would not incur any long-term and/or roll over short-term debt, if, after incurring such debt, the debt/equity ratio of the company would exceed 60/40; (b) YPF would maintain a projected debt service coverage of at least 1.4 time; and (c) YPF would not, without prior Bank consent, declare dividends if the quick ratio fell below 0.8 to 1. 8 2.26 The Refinery Conversion Project cost was estimated at US $878 million . The Bank was to contribute $200 million and foreign commercial sources $421 million. The remainder, i.e. US $257 million, was to be financed by YPF internally generated funds or government funds. Because of the Government's substantial influence on the prices of petroleum products and to ensure availability of necessary resources to complete the project, assurances were received from the Government that it would meet any shortfall in funds to finance the Project. Implementation 2.27 The loan was approved on August 7, 1981, signed on October 2, 1981 and declared effective on February 5, 1982. Conversion Scheme 2.28 The physical completion of the Refinery Conversion Scheme was almost immediately delayed. The completion period envisaged was 30 months but YPF decided to allow a period of 35 months for contractor's work schedule. 2.29 Ex-refinery prices in real terms increased by only 1 percent in January-September 1981 while the retail prices were raised by 11 percent. It was then feared that unless refinery prices were increased substantially, YPF would be unable to generate enough funds to finance the Project. YPF's quick ratio by end 1981 was 0.23 :1 and the debt/equity ratio was 64/36 compared with 0.6 :1 and 60/40 required under the Loan agreement. 2.30 The project's physical implementation was impeded in 1982-85 because of the 1982 Falklands war (which prevented the free importation of necessary equipment) and delays in completing the basic engineering for the conversion operations. By mid 1984, the time lost for these reasons appeared wrongly to Bank staff to have been partially recouped but subsequent events showed that the main conversion works at both Lujan de Cuyo and La Plata refineries, were only completed in April 19, 1988 and December 13, 1989, instead of June 1985 as originally planned9 2.31 The Plant Operations Improvement Program (POIP) was also considerably delayed due mainly to the lack of Government funds necessary to provide YPF with the necessary counterpart 8. Of which US $439 million in foreign exchange i.e. 50%. 9. Cf PCR paras 12-15 for details. 24 funds to finance execution of the POIP. However, most of the subcomponents were finally completed by end 1989 (including conservation and pollution items), with the exception of some support equipment for the main old refinery installations, where most of the financing under this component was to be provided directly by YPF (cf. PCR para 17). Financial Aspects 2.32 YPF originally planned to finance a significant part of the cost of equipment and engineering services from foreign commercial banks and other sources, and to use a substantial portion of the Bank loan for construction and erection work in the conversion operations. However, YPF proved unable to obtain the planned foreign borrowings because of Argentina's difficult economic situation in 1982-1983. As a result, YPF decided in late 1985 to use the Bank loan to finance only foreign equipment, materials and spares, and to use local funds as much as possible to finance the cost of local equipment. 2.33 Simultaneously, there was a significant reduction in project costs as a result of a massive devaluation of the peso and the increased competitiveness of domestic suppliers of equipment and services. Also, foreign exchange costs became lower because of the depressed international demand for project equipment. 2.34 The total financing requirement of the project was thus revised downward from $878 million to $770 million. The foreign exchange cost was $362 million against $439 million . At appraisal, project cost was expected to be financed through internal cash generation (US $257 million or 29 percent), and loans (US $621 million or 71 percent) from the Bank ($200 million) and from foreign commercial resources ($421 million). However, besides the Bank loan and a small Japan Eximbank ($17 million) no other external financing materialized owing to the country's financial crisis which erupted in 1982. As a result, despite the considerable reduction of the project's foreign exchange requirements, a substantial foreign exchange gap remained unfilled. Project Financing Requirements (US $ million) Appraisal estimates 1986 estimates Actual costs Local Foreign Total Local Foreign Total Local Foreign Total Refinery conversion 413.3 409.4 822.7 357.1 328.5 686.1 543.3 259.4 802.7 Plant operations 24.0 26.0 50.0 50.1 23.7 82.8 96.4 20.0 116.3 improvement Other components 1.7 4.0 5.7 0.1 0.7 0.8 - 0.2 0.2 Total 439.0 439.4 878.4 407.8 361.9 769.7 639.7 279.6 919.3 2.35 Since further external commercial financing was unavailable, and in order to avoid halting on going construction on the Conversion scheme, the Bank was requested and agreed to provide a $116 million supplemental loan. Since, in addition, YPF and the Government were unable to provide additional funds to the Project, the Japanese Eximbank agreed to fill the 12 foreign exchange gap through a second loan of US $186 million 10. Local cost also went down from $439 million to $408 million. I1. Prepared for the 1986 Supplemental Loan. 12. World Bank and Eximbank thus contributed $502 million i.e. 55% of Project final total costs. A co-lender agreement was approved in February 1988. 25 2.36 The new Loan Agreement of May 1986 which brought total Bank lending for the Project to US $316 million provided that: (a) the Financial Management Improvement Plan be carried out in a manner and according to a timetable satisfactory to the Bank (delays had been experienced). (b) a quick ratio of 0.6:1 be maintained. (c) a debt/equity ratio be attained not greater than 68:32 in 1987, 66:34 in 1988 and 60:40 in 1989 and thereafter. (d) a YPF draft budget be furnished to the Bank for each following fiscal year for comments. (e) The Government would make capital contributions to YPF so as to enable YPF to pay, when due, principal and interest on YPF financial external debt and its internal 13 debt. 2.37 The principal issue involved concerned YPF's financial situation. The financial covenants under the Loan were not being met in 1984-85 as shown below: Financing Covenants 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Quick ratio 0:11 0:69 1:24 0:74 0:81 1:13 1:18 0:69 0:74 0:82 0:60 Debt/equity ratio 28:72 33:67 56:44 06:94 07:93 22:78 25:75 8:92 8:92 8:92 12:88 Debt Service Coverage 1:15 0:99 0:97 1:71 1:53 1:01 1:52 2:41 12:79 11:92 12:05 2.38 The Loan called for YPF to maintain a quick ratio of 0.6:1 and a debt/equity ratio not greater than 40:60. 2.39 YPF was unduly burdened by its excessive medium and long-term debt, which amounted to $6 billion, of which $4.5 billion in foreign exchange. A condition of the supplemental Loan and of the Gas Utilization Loan approved on June 25, 1985 (see below) was that the Government would service a fixed portion of YPF's external debt. This was needed to restore YPF's compliance with the financial covenants of the Refinery Loan. The Government agreed in 1986 to improve YPF's financial viability through direct injections of treasury contributions to clear YPF's payment arrears and service its external debt. 2.40 From 1987 on, YPF included in its accounts a new bond representing the Government's obligation to YPF to service its financial debt. The Government was committed to service this bond, and the debt service on the bond was to compensate exactly for the debt service that YPF paid to commercial banks for financial debt, including exchange losses. 2.41 As a result, YPF was able to comply with all its financial covenants from 1987 onwards. The quick ratio was 0.74 at the end of 1987 and 0.81 in 1988, over and above the covenanted 0.60. 13. i.e. 54.5 billion for external debt and S1 billion Australes for internal debt. 26 2.42 Capital expenditures were $706 million equivalent in 1987 and $700 million were budgeted for 1988. The debt/equity ratio was below 10:90, as the above mentioned bond was offsetting the "financial" debt, and YPF still did not have much long term debt related to its own operations. YPF's long term debt increased, though, in 1989/90 with the disbursements from the Gas Utilization (GUTA) and the Japanese Eximbank Loans,14 but the debt-equity ratio stayed within the covenanted limit. Financial Management Improvement Program (FMIP) and Training 2.43 Some progress was achieved in accounting organization and information systems. YPF was divided in some 20 accounting units, e.g. major oil provinces, each refinery, sales districts, etc. Each of these units had its own accounting system and produced monthly financial statements to YPF's headquarters in Buenos Aires for monthly company-wide consolidation. The consolidated statements were converted to inflation-adjusted local currency. However, they were not legally separate entities, and by 1989, YPF had not yet introduced transfer prices and billing between these units, e.g. for crude oil deliveries from production areas to the refineries. Therefore, these units could not yet account for their own revenue and were not yet profit centers in the full sense of the term. The funds made available under the Bank Loan for FMIP ($1 million) were not utilized. In addition, only $0.2 million of original of $1 million for training were used. However, this can be explained by the fact that this program was in practice transferred to the GUTA project (see below). Energy Conservation 2.44 The Industrial Energy Audit was not implemented. First, the Secretariat of Energy felt in 1984 that the terms of reference for the work should be expanded to include not only energy audits but also a comprehensive training program and strengthening of the institutional framework for energy conservation. Second, after initial work on appointment of foreign consultants, further work was abandoned by the Argentine authorities who believed that audits could be performed by the production units themselves or by local agencies. 2.45 A major reason for non completion of the component was the scarcity of foreign exchange financing in the country as a whole, which induced the authorities to shift the responsibility of the energy conservation to production units themselves using local resources. However, as mentioned above, the implementation of energy conservation subcomponents under the POIP was successfully carried out, since related cost savings were quite obvious to YPF. Results The Conversion Scheme 2.46 Production of light/middle distillates by both refineries rose from 7.4 million tons in 1981 to 10 million tons in 1993 i.e. by 2.6 million tons. Durinf the same period, fuel oil output fell from 3 million tons to 1.2 million (i.e. by 1.8 million tons ). This means that the project main objective to increase higher value light/distillates production was basically achieved. 14. Supervision of financial and pricing conditionalities was in practice shifted to the GUTA from 1987 onwards (see para. 2.79). 15. These figures are expressed in tons of oil equivalent (TOE). The production of light/middle distillates went up from 9.3 million cubic meters in 1988 to 12.3 million in 1993, a 3 million cubic meters increase. The fall in fuel oil production was 2.0 million tons (3.3 in 1988 and 1.3 in 1993). 27 2.47 However, the economic return on investments was lower than anticipated because actual ex refinery prices (based on international prices) were much lower than expected at appraisal . 1993 prices for gasoline were about 35 percent lower and price for gas oil or kerosene about 50 percent lower. Consequently, expected benefits from the project decreased significantly. 2.48 Demand for petroleum products was also lower than anticipated. Total Argentine consumption was not higher in 1993 than in 1988 i.e. 21 million tons. Petroleum was partly displaced by natural gas (as anticipated at appraisal) but mostly by hydroelectricity whose consumption grew from 12 million tons oil equivalent in 1988 to 17 million tons in 1993. Total apparent energy consumption rose by 1.7 percent p.a. in 1988-1993, a substantial slowdown compared to previous years, linked to a sluggish GDP growth of about 2 percent p.a. during the same period. 2.49 As a result, capacity utilization went down from 66.3 percent in 1988 to 57.1 percent at the La Plata refinery. Capacity utilization at the smaller Lujan de Cuyo refinery rose to a peak of 97.6 percent in 1993 but fell to 87.4 percent in 1994 . The high ratios of 1992-1993 resulted from a larger allocation of available crude to the refinery resulting from new oil wells in production at Puerto Hernandez (Neuquen basin) and completion of the integrated crude pipeline 20 network . However, in 1994 YPF's decision to divert crude oil to a new crude oil pipe to Chile resulted in a 10 percent reduction in crude supply21 to Lujan de Cuyo with the result that capacity utilization was lowered to 87.4 percent. Capacity utilization is expected to increase only slowly until year 2000 (a 92 percent rate is projected for 2000). 2.50 The SAR had assumed a 95 percent capacity utilization rate for both refineries whereas the average actual utilization rate for both was 77 percent only in 1988-9422. This lower rate combined with much lower prices reduced the economic rate of return below the 48.2 percent envisaged at appraisal: in 1990, the Borrower's PCR had re-estimated the average ERR for both refineries at 10.9 percent23; the latest recalculated ERR is even lower since ex-refinery prices declined by more than 10 percent in 1989-94(see Table IX) and actual production of light/middle distillates in 1989-1993 was more than 20 percent lower that the output projected in the PCR. Capacity utilization was consistently below what had been anticipated. 2.51 The recalculated ERR for La Plata refinery is negative (-12.2 percent)24 due to low capacity utilization rate (75 percent only in 1988-89 against 95 percent projected) and low ex- refinery prices. The ERR for Lujan de Cuyo is positive (8.2 percent) but below the 10 percent rate generally considered as minimum acceptable and the 14 percent threshold used in YPF. While capacity utilization at Lujan de Cuyo has been higher than at La Plata (particularly in 16. Import parity prices derived from West Texan Intermediate (WTI) crude prices. 17. See comparison in Table IX. 18. See Table . 19. Cf Table VIII. 20. In previous years, crude was transported by rail, pipe and trucks to Lujan de Cuyo and there was a supply bottleneck until the integrated crude pipe was completed. 21. YPF crude exports went up in 1994 because it proved more profitable to export crude than refined products. Sluggish domestic demand combined with increased crude exports to reduce capacity utilization. 22. Cf Table VIII. 23. Benefits were projected over the 12 year period 1988-2000. 24. Investment cost at La Plata was about 55% of the Refinery Conversion Scheme total cost and the methodology used for recalculating the ERR was the same as in the SAR and the PCR (Part II), i.e. calculating net benefits resulting from the increase in light/distillate products and the decrease in fuel oil production resulting from the Energy Conversion Scheme (the with and without approach). 28 recent years, i.e. 96 percent in 1992 and 97,6 percent in 1993), it is unlikely (according to YPF recent forecast) to average more than 87 percent in 1995-2000. 2.52 Much lower refinery prices, cost overruns (10 percent above the Refinery Conversion Scheme revised estimated cost of 1986), higher than expected operating costs and low capacity utilization due to sluggish demand, have all combined to eliminate a large part of the net economic benefits expected at appraisal. Financial and Management Performance 2.53 Whereas the Refinery Conversion Scheme (including the plant operating improvement program which aimed at reducing pollution and save energy) was at least physically completed albeit with long delays (3 to 4 years), results on the financial and management side were even less satisfactory. 2.54 The agreement that YPF would prepare an action plan to improve accounting cost control and finance system was only partially complied with. Cost centers were established but could not account for their own revenues and were not actual profit centers as planned. 66. As part of its proposed restructuring, YPF wanted to introduce invoicing of revenue and costs between certain units in order to develop them into profit responsibility centers. This was done only recently and changes were certainly not brought about under the Refinery Conversion Project but under subsequent Bank loans (GUTA and PERAL). 2.55 The same can be said regarding the Information Systems Master Plan which aimed at completely modernize the existing computer systems which were the result of acquisitions and extensions over time, some of the hardware in use being up to 15 years old. No progress was made under the Refinery Project and YPF subsequently asked the Bank to finance corresponding activities under the GUTA and the PERAL. 2.56 Although financial covenants for the quick ratio and the debt/equity ratio were met in 1987-1989 (the Refinery Loan closing date was December 31, 1989), YPF was not able to comply with the minimum 6 percent rate-of-return covenant, whether measured at the operating income or at the net income level. YPF showed a net after tax loss of $841 million in 1989, the last year of the Loan. 2.57 YPF adjusted the retail prices of both diesel oil and fuel oil with respect to the price of regular gasoline as requested by the Guarantee Agreement 26. However, the fuel oil price was still too low to permit YPF to fully comply with the Agreement. 2.58 YPF had no major role in setting prices of crude oil, natural gas and petroleum products and therefore had only limited possibilities for improving its refinery margins. Part of YPF massive financial deterioration, stemmed from the Government's failure to maintain adequate ex- refinery prices of YPF's products. 25. One must however point out that the agreement with YPF to construct a crude pipeline from the Neuquen fields to Lujan de Cuyo refinery and a product pipeline from the refinery to the Buenos Aires area was not fulfilled due to lack of foreign exchange. However this was financed under GUTA and completed in 1992-93. 26. The objective was to have a more rational price structure of refined product prices. 29 2.59 YPF remained excessively taxed with negative impact on YPF's operating income and cash generation for future investments. A cumbersome and heavy system of taxation was still in place by 1989. 2.60 YPF failed to abide by the auditing and reporting covenants. Drafts of YPF's budget for the following fiscal year were often delayed. 2.61 The Energy Conservation Study, the Pollution Control Study and the Industrial Energy Audit Study were canceled and the funds were reallocated to acquisition of equipment, spare parts, erection and construction works. 2.62 Overall, funds allocated under this Project component (US $5.7 million of which US $4 million in foreign exchange) were almost totally unused. Only US $0.2 million was spent on financial management training. 2.63 The fear expressed by some Bank staff during project preparation that the loan would end up financing equipment for a Refinery Conversion Scheme without having any significant impact on much needed financial and management restructuring of YPF proved justified. During the period of project implementation, YPF and the Argentine authorities did not feel really committed to drastic changes in hydrocarbon policies (e.g. pricing and taxation) and in the way YPF was organized and managed. Until 1989 (i.e. the year when the Refinery project was completed), when a new Government came to power with a more liberal approach to the hydrocarbon sector issues, little progress had been made and the policy objectives that were originally introduced as key to the success of the project had not yet been met. However, impressive progress has subsequently been achieved in reforming the hydrocarbon sector, partially supported by the GUTA loan (see para. 3.41). Sustainability 2.64 Sustainability of the various project components is likely. The technical sustainability of the refinery conversion has been assured by the continuous safe operation of the refineries. The crude and product pipelines for the Lujan de Cuyo refinery have been finally completed and financed under the GUTA project (see below). The GUTA loan also helped finance unfinished sub components in La Plata and Lujan de Cuyo refineries. Some progress has been made on pollution and energy conservation and substantial investments are still being made to that effect27 2.65 Modernization of instrumentation processes is being pursued. Planned information systems are currently being put in place. 2.66 However, there are obviously remaining insufficiencies, particularly at La Plata. In the latter refinery these include sub optimal yield performance, levels of energy consumption that are higher than average industry performance, and above average hydrocarbon losses. 2.67 YPF is implementing a number of projects that are aimed at addressing the operating inefficiencies and improving quality at La Plata. A revamping of the refinery's crude fractionation systems by retiring two of the four distillation units and reducing operating inefficiencies in the remaining units should produce substantial energy and maintenance savings 27. The Refinery Project included pollution control and energy conservation sub components in both refineries. 30 without reducing throughput capacity. Other projects are designed to permit higher utilization of fuel conversion units and feedstock slate modifications (specifically the use of a higher percentage of lower cost heavy crudes to maximize profit margins), consolidate separate control rooms into one location, and further reduce energy consumption. At Lujan de Cuyo, various projects are in process to improve yield and plant efficiency. These projects will complete the conversion of the refinery's gasoline production to unleaded gasoline by the end of 1995. 2.68 Financial sustainability of the refining operations has been improved in recent years, particularly after the major restructuring and subsequent privatization of YPF in 1993. In the past, substantial labor expenses contributed to high operating expenses at La Plata Refinery. YPF has reduced the total work force from 9400 employees in 1990 to approximately 2,600 employees in 1993. YPF has also reduced the total work force at Lujan de Cuyo from 1,600 employees in 1990 to slightly over 780 employees in 1993. 2.69 Refining (and marketing) operating income has improved from a loss of Pesos 465 million in 1991 and 100 million in 1992 to a profit of Ps 138 million in 1993. The improvement resulted from a decrease in average internal transfer prices for crude oil furnished by YPF to its refineries. This was in line with the decrease in international oil prices during the period. Others costs such as salaries (as a result of employment reduction) and lower energy consumption also contributed to lower costs. 2.70 Losses on export sales of crude oil and products contributed significantly to the operating losses in downstream activities in 1991 and 1992. In 1993, financial profitability rose as a result of lower domestic sales of diesel and fuel oil, the production of which YPF reduced due to low margins. Reduced production of these products permitted the increased production of higher margin products. Gasoline prices rose by 10.5 percent in 1993 . 2.71 Institutional building objectives were not only to improve YPF's major refineries but also to strengthen the entire company's financial and management systems. As indicated above, results were poor under that project but efforts were pursued in subsequent years under GUTA and PERAL. The institutional impact of the Refinery project was thus only modest, major improvements having taken place only later with YPF's restructuring and privatization in 1993. Bank Performance 2.72 Bank performance was affected from the start by a serious difference of opinion within the Bank regarding the project's objectives. Senior Bank management was of the opinion that institutional building aspects (financial management, cost accounting, training) as well as pricing considerations (oil prices to be progressively raised to international levels) were key to the project's success (cf. Minutes of Board Meeting. July 7, 1981) and thus insisted on corresponding conditionality to be included in the loan agreement. However, Bank project staff felt that, in the Argentine political and economic context, the Government and YPF were unlikely to rapidly change oil policies and YPF's management behavior. In addition, given the fact that newly large discovered natural gas reserves had to be developed and that production of surplus fuel oil had to be sharply reduced, the Refinery Conversion Project was fully justified in itself, even at the cost of not moving rapidly on institutional building and pricing aspects. 28. Petroleum prices were deregulated in 1989. 31 2.73 Bank Project staffs concerns proved justified: YPF management was never fully committed to major institutional building efforts and the Government did not take decisive action on prices until 1990 when oil prices were deregulated. As a result, project staff hardly had a real "dialogue" with the Argentine on these subjects. 2.74 Already during appraisal, Bank staff had experienced difficulties in carrying out a detailed financial analysis of YPF. Analysis of YPF's financial statements was complex because: (a) the accounting system had been gradually changing since 1977 from a budgetary system to a financial accounting system, and (b) YPF's accounting periods had been somewhat irregular in the past. Despite serious problems with data availability, Bank staff tried to carry out a detailed financial analysis of YPF (cf. SAR. para. 3.12 to 3.18 and Annexes 3-1 and 3-2) which showed that YPF's cash flow and operating profits were not adequate to finance a reasonable part of the projected large investment program of YPF ($12.5 billion during 1980-1989). Bank staff concluded that Government would have to take measures to increase ex-refinery prices at a level such that YPF's would be able to earn a "reasonable" return on net fixed assets. 2.75 Another problem was YPF's inability to prepare consolidated financial projections for all its operations including oil exploration and production, refinery, marketing, etc. Bank staff felt they were not themselves in a position to make their own financial projections (particularly difficult to carry out given the high prevailing inflation rates and successive devaluations of the Argentine currency), and chose instead to limit detailed financial analysis to YPF Refinery division. They also felt that the Refinery Conversion Project was justified in itself with a projected 48 percent ERR and that overall financial and institution building considerations were relatively secondary. Bank staff, facing YPF's reluctance (or inability) to address financial issues, devoted most of its time to helping YPF implement the physical aspects of the Project. Relatively little time was devoted to financial supervision (made in any case particularly difficult during the years of hyper inflation). This, in retrospect, was a short-sighted approach as arguably, a better appraisal and monitoring of YPF's overall finances (admittedly under challenging circumstances) could have allowed the Bank to appreciate their sensitivity to external shocks, and to prepare for it rather than to have to rush the processing of a sizeable supplemental loan. 2.76 As indicated in the PCR (para. 25) the Bank played a key role in ensuring smooth project execution, following-up closely on the construction and procurement schedules and monitoring disbursements. 2.77 As mentioned earlier, YPF's massive financial deterioration in 1983-85 resulted in its inability to mobilize enough of its own resources to finance the cost of the Project. One reason was the poor general economic situation which made it impossible for YPF to obtain foreign commercial loans and export credits as originally anticipated. However it had been also agreed that, because of the Government's substantial influence on the petroleum prices and the need to ensure availability of necessary resources to complete the project, the Government would meet any shortfall in funds to finance the Project. It appears that the Bank did not push very hard for the Government to fulfill that condition. The latter was indeed facing a difficult economic situation and may have had real problems in mobilizing resources for the Project. Moreover, at that time (i.e. 1985), the GUTA loan had been approved with relatively more stringent financial and pricing conditions than for the Refinery Conversion Loan. Bank staff from the Energy Department-while the Refinery Conversion Project was being supervised by the Industrial Projects Department-was certainly eager to pursue good relationship with the Government who 32 remained the sole authority in setting prices and taxing YPF's resources. Moreover massive Japanese funds had become available ($370 million were provided for GUTA and the Refinery Project). 2.78 The Bank decided to increase its own participation (from $200 to $316 though a supplemental loan signed in 1986) rather than to insist on the Government's meeting any shortfall in funds. The Bank was also instrumental in YPF being able to mobilize large Japanese resources both for GUTA and the Refinery Project. However, the fact that a US $116 million supplemental emergency loan had to be mobilized very quickly to complete the on-going project is quite revealing of the discrepancy in Bank performance regarding its successful support of physical project implementation on one hand, and its lack of attention to financial and institutional aspects, on the other. 2.79 From 1986 onwards, Bank financial supervision of the project was carried out as part of supervision of the GUTA loan. In fact there was no supervision mission at all between November 1985 and May 1987. Bank staff concentrated almost exclusively on the physical implementation of the Conversion Scheme at La Plata and Lujan de Cuyo refineries. Given the above shortcomings, Bank performance overall under the Refinery Conversion project is assessed as deficient. 33 3. Gas Utilization and Technical Assistance Project (GUTA) Objectives 3.1 The objectives of the project were to improve Argentina's balance of payments29 and foster the county's economic recovery through: (a) substituting natural gas for petroleum products; (b) expanding the use of enhanced oil recovery operations; (c) promoting natural gas exports; (d) reestablishing YPF's financial equilibrium and improving its financial management and controls; and (e) developing Government's capabilities for more comprehensive planning of energy use and development. 3.2 Although there were sufficient natural gas reserves, their development posed a number of technical and economic issues. In particular, oil and gas production had to be jointly optimized. In several areas oil production had had to be limited to avoid the flaring of large volumes of gas for which there was no outlet into the pipeline network. In other areas (e.g. Buenos Aires), gas demand remained partly unmet in winter. Lack of infrastructure was the principal constraint to YPF and Gas del Estado (GdE). Flexibility to move gas supplies and gas pipeline capacity expansion was needed to ensure gas availability in main centers in the Buenos Aires area. Scope, Concept and Design 3.3 GUTA was part of a strategy to assist YPF's restructuring through a series of Bank financed projects. As indicated above, two projects (Oil and Gas Credit and Refinery Conversion projects) were approved in 1981. The Refinery project was originally to be completed in June 1985. In addition to financing downstream operations (Refineries), the Bank also sought to assist upstream development. A project had thus been identified by the Bank's Energy Department in 1981 (one year after the refinery project itself had been identified by the Industrial Projects Department). 3.4 However, GUTA was not approved until 1985, and only after considerable changes in scope. Part of the delay arose from uncertainties about Argentine energy policies with the 1983 change in Government and its attitude regarding the negative impact of petroleum products prices being fixed by the Government with frequent failure to adjust prices in time with inflationo. Other factors were YPF's continued control of private sector operations and YPF 29. Cf Loan Agreement Schedule 2, page 20. 30. Little progress had been made in the dialogue between the Bank and the Government on pricing issues under the Refinery project. 34 poor financial performance, caused largely by its huge outstanding foreign debt (about $5 billion) which had in fact be incurred on Government's behalf. 3.5 Finally, although the project identified in 1981 dealt with oil exploration and development, the issuance of the Bank's new policy for the oil and gas sector in 1984 largely limited its assistance to gas development support. As a result, the scope of was amended to encompass primarily gas utilization and technical assistance. Components 3.6 The project included five major components: a) Production of gas and associated liquids in Campo Duran near the Bolivian border in the North. b) Optimization ofjoint oil and gas production from existing fields in various parts of the country through debottlenecking sub projects and Enhanced Oil Recovery (EOR) pilot projects. c) Completion of crude and product pipelines to and from the Lujan de Cuyo refinery. d) Substitution of gasoline and diesel use in motor vehicles by compressed natural gas (CNG) through a pilot program. e) Institutional improvements of (i) YPF, through technical assistance aiming at strengthening YPF organization, accounting and investment program, and (ii) the Government, through assistance in energy sector planning. 3.7 Total project costs were estimated at $803 million to which the Bank was to contribute $180 million, IDB $60 million (for a gas pipeline from Campo Duran to Buenos Aires) Ind YPF/GdE/Government the remainder (i.e. $ 563 million). 3.8 The largest project component was the Campo Duran project as shown below: GUTA project costs S million Percent Campo Duran facilities"' 440.0 54.8 Gas debottlenecking and EOR 118.9 14.8 Lujan de Cuyo oil pipelines 168.8 21.0 C.N.G. (pilot-project) 16.0 2.0 Technical assistance 12.1 1.5 Base cost 755.8 94.2 Interest during construction 46.8 5.8 Total 802.6 100.0 31. Including gas field development, liquid processing plant, gas pipeline (IDB). 35 3.9 The Bank emphasized again (as it had done it during negotiations of the Refinery Conversion Loan) financial management issues and the role of the private sector. The Bank requested the restoration of YPF's financial equilibrium, which entailed the restructuring of the company's equity and external debt as well the establishment of a realistic budget for YPF's operations. It was hoped that this would serve as a basis for YPF to prepare reliable financial projections showing how and when YPF could be expected to restore its compliance with the financial covenants-which were not complied with in 1983-1985 32--of the Loan Agreement for the Refinery Conversion project. Thus, two government decisions were needed: (a) approval of YPF's budgets based on realistic income and expenditure projections; and (b) measures to either increase YPF's equity or decrease its external debt to the extent needed to restore YPF's compliance with the existing financial covenants with the Bank. 3.10 The second requirement was the launching by YPF of a program to strengthen and rationalize its cost accounting and financial planning procedures. YPF was already committed to an initial effort to this end under the Refinery Conversion Loan, but, nevertheless, YPF had made little or no progress on this work. The Bank considered that an expanded program of institutional strengthening had to be an integral part of GUTA. The aim was to implement, on a company-wide basis, a comprehensive system of expenditure controls, inventory management and financial planning, integrated by an effective management information system. Since no result had been achieved under the Refinery Project, the Bank wanted to pursue institutional development objectives through the new GUTA loan. 3.11 The third requirement was the conclusion of the process of renegotiating production contracts between YPF and private oil companies. Insufficient progress had been achieved in this respect under the Oil and Gas Credit approved in 1981 for on-lending to private firms operating in the hydrocarbon sector. The Bank wanted to use its leverage through the new GUTA loan to clarify the status of the contracts between YPF and private oil companies. 3.12 The Argentine Government agreed to make capital contributions to YPF to pay all financial charges, including principal, on its external debt, estimated at about US $4.5 billion. The amount to be paid by the Government was originally US $3.3 billion33 but was later revised to US $4.15 billion in an amendment approved by Board in May 1986 . Execution of the arrangements to provide this capital contribution was a condition of loan effectiveness . 3.13 YPF agreed to carry out: (a) a review of its organization and management structure, with the objective of streamlining decision-making, improving operational efficiency (including more 32. The GUTA loan was approved in June 1985. 33. Loan Agreement approved in June 1985. 34. The Refinery Conversion Supplemental Loan was also approved in May 1986. Negotiations under this Loan led to a modification of the GUTA 1985 Loan Agreement. 35. Negotiations of the Supplemental Loan for the Refinery Project took place in March 1986. The Bank refused to sign this Loan until GUTA which had been approved by the board in June 1985 but not signed, was signed by the Argentines. Such signature took place in May 1986, after amendment to the GUTA Loan (including larger Government contribution to YPF for its extemal debt). The Supplemental Refinery Loan was then also signed on May 5, 1986. 36 effective use of subcontractors), and assuring appropriate balance between exploration and production activities. (b) improvements in its accounting, budgeting, financial control and management 36 information systems (c) developing a medium and long-term investment program and priorities and defining the appropriate level of investment required to ensure Argentina's self sufficiency in crude oil production. Work in this area was to help define the level of investment to be undertaken by YPF in complementing the exploration activities of private oil companies. (d) Training associated with each of these components. 3.14 In negotiating both GUTA and the Supplemental Loan for Refinery Conversion Project, the Government also agreed to carry out a study on structural reforms of the oil and gas sector37 38 and to submit to the Bank for review and comment YPF's annual budgets 3.15 The Government finally agreed to undertake energy sector planning studies. A significant amount of US $2 million was allocated in the Project to that effect. 3.16 The Bank's willingness to approve the GUTA loan appeared to have been a compromise between the conflicting goals of preserving Argentina's petroleum self sufficiency and that of reducing the public sector's deficit. The former goal required YPF to maintain a reasonable level of investment supported in part by the GUTA loan until private investors could take up more of the slack created by YPF's reduced activities in exploration production. On the other hand, it was clear that YPF's finances could not improve without larger treasury contributions. 3.17 Partly as a result of its dialogue with the Bank on energy policies in the mid 1980's, the Government had taken steps to increase private sector involvement in the sector39 and considered restructuring YPF with the objective of resolving YPF's financial difficulties. 3.18 However, the restructuring of YPF was expected to take time and private exploration investments would not begin to be productive before the early 1990's. Until these long-ranging reforms were implemented, the Government decided to restore YPF's financial viability through direct treasury contributions to clear YPF's payment arrears and service its external debt. The Government's decision restored YPF's financial viability and triggered the Bank's willingness to lend to YPF through GUTA. The latter Loan was considered as another step in providing leverage in encouraging private sector investment and in leading to YPF restructuring and greater efficiency. At the time, the Bank was definitely not thinking in terms of YPF's privatization. 36. Part of expenses was to be funded from undisbursed amounts under the technical assistance component of the Refinery Conversion Project with which this work was to be integrated. 37. Agreement on terms of reference and timetable for the study was a condition of Board presentation. 38. Failure to reach an agreement on these budgets was to constitute an event of default. 39. e.g. acreages held by YPF were offered to private sector for exploration and YPF investments were reduced. 37 Implementation 3.19 The Loan was declared effective in September 1986, i.e. four months after signing. As mentioned above, there had been almost a one year delay between Board approval (June 1985) and signing (May 1986) pending completion of negotiations of the Refinery Conversion Project Supplemental Loan: the 1981 project was not performing and the Bank was eager to obtain assurances on both physical and financial conditionalities. Effectiveness took place after the Government made capital contributions to enable YPF to service its debt. The Study on sector reforms and institutional restructuring was also initiated. 3.20 The GUTA loan was closed two years later than anticipated (December 31, 1993 instead of December 31, 1991).40 Two major physical objectives were substantially achieved. (a) The Campo Duran installations were completed (installation of a new LPG extraction plant41 and expansion of an existing one; completion of the IDB financed gas pipeline). (b) The crude and product pipelines to and from the Lujan de Cuyo refinery were completed. This proved very useful particularly since the refinery suffered from extra cost in crude supplies due to the lack of pipeline infrastructure. GUTA filled a serious gap since this component was to be achieved in connection with the Refinery Project but had been delayed by YPF's lack of funds. 3.21 However, the debottlenecking sub projects component was considerably modified. Sub projects to remove bottlenecks which were thought to prevent YPF from moving towards more optimum production of oil and gas from existingfields were not undertaken. Instead, YPF decided to finance urgent short term revamping or replacement of refinery components. Instead of spending US $37.5 million on gas debottlenecking sub projects, US $69.7 million were invested, mostly in refining equipment, i.e. considerably more than anticipated. It is not clear why investment needs had not been previously identified (and eventually included) under the Refinery Conversion project. 3.22 Funds allocated to the enhanced oil recovery (EOR) projects were only very partially utilized. US $10 million were spent instead of US $56 million anticipated. Out of the ten fields identified as suitable for use of EOR methods, only one was completed. It would appear that part of available funds under this component were used to finance more urgent restructuring and privatization studies required under PERAL (technical assistance funds under GUTA originally amounted to US $12 million but US $46 million were in the end spent to support PERAL technical assistance requirements). In addition YPF's management was probably not very eager to finance EOR projects in some areas likely to be transferred to private oil companies. 3.23 The compressed natural gas component was only partially implemented and US $4.1 million spent instead of US $16 million originally planned. The Bank's contribution was US $2.5 million instead of US $9 million envisaged. Although the staff appraisal Report had expected 366 CNG stations to be installed in YPF by 1994, the actual number has been 149 40. As indicated in paragraph 103, there was more than one year delay between Board approval and effectiveness (June 85 to September 86). 41. However ethane could not be produced as foreseen because of lack of market for petrochemical use. 38 only42. Consumption in 1994 was 171 million cubic meters i.e. 40 percent of the 436 million anticipated. CNG consumption slowed down considerably in 1992 and later when taxation of competing diesel was eliminated. Before 1992, CNG was 30 to 40 percent cheaper than diesel, the rationale being to compensate users for the relatively high conversion costs of vehicles to CNG (about $2,000). YPF and other oil companies have also little incentive to build CNG stations (in fact owned by independent dealers) since YPF buys natural gas from gas distribution companies and YPF is entitled to only 4 percent of the dealer ($0.13/cubic meter) distribution margin. Moreover, installing compressors in a CNG refilling station costs as much as $400,000 and erecting a full fledge CNG station including buildings and pumps may cost $800,000. Selling CNG appears to be profitable only if sales are above 120,000 cubic meters/month, which is the break-even point given the relatively high investment cost. In 1994, the average sales volume per station was 96,000 cubic meters/month (including stations selling CNG only). The GUTA project has provided funds to build 20 new stations and retrofitted refilling stations (30 refilling pumps) and technical assistance. The actual expenditure under the GUTA-pilot project was $4.1 million only including $2.8 million for purchase of compressors and equipment for 8 CNG stations and $1.3 million for an optimization study of CNG use. The remaining stations were financed either directly by YPF and/or by dealers interested in CNG. 3.24 The technical assistance component originally amounted to $12 million of which $10 million for YPF studies and $2 million for energy planning studies to be performed under Government supervision. Actual expenditures were much higher than anticipated: GUTA Technical Assistance Component Costs (US$ million) Estimated costs Actual costs YPF organization and structure study 0.4 5.4 Management information systems and accounting 2.1 6.3 Fields automatization43 2.8 7.4 Investment Program 0.4 6.4 Marketing of exports 1.2 9.9 Training program 1.2 - Energy planning 2.0 10.9 Total 12.0" 45.9 3.25 In contrast with the Refinery Con,ersion Project where technical assistance funds remained unutilized, the TA funds GUTA were not only used for the intended purposes (i.e. YPF organization and structure, management information systems and investment program, etc.) but were vastly expanded. 3.26 The public enterprise adjustment Loan (PERAL) approved in February 1991 when GUTA was still active (GUTA was closed only on December 31, 1993) included a number of objectives aiming at restructuring and privatization of a number of public enterprises (YPF, GdE, Entel, the Railways, etc.). A $23 million technical assistance loan (PEREL) was attached to 42. of which 66 were only selling CNG. 43. Use of telecommunications equipment for automated remote field production management. 44. Including $1.90 million for price contingencies. 39 PERAL to finance necessary experts and studies. However PEREL funds proved insufficient given the extent of the task at hand and GUTA funds were tapped to assist in the process. 3.27 While $3.4 million of PEREL funds were disbursed to finance technical assistance to the oil and gas sector (e.g. to pay for legal advice for GdE privatization, etc.), GUTA funds used over and above the original estimated cost amounted to about $34 million. In particular the energy planning component budgeted initially for $2 million absorbed $10.90 million, which in fact were used for a number of general framework and sector studies going well beyond energy planning stricto sensu. A part of the success of the work accomplished under PERAL was made possible by the use of GUTA funds. Out of a total cost of $45.9 million, the Bank contributed $38.7 million i.e. about 84 percent, an indication of the Bank interest in supporting PERAL objectives. 3.28 Final project costs were significantly below what had been originally envisaged because drilling of gas wells in the Campo Duran area either did not take place or was undertaken by private sector contractors who operated nearby gas fields (Ramos and Acambuco). Also, as previously explained, the scope of the enhanced oil recovery (EOR) component was substantially reduced. GUTA. Estimated and Actual Costs (USS million) Estimated costs Actual costs Field development 102.8 --- Gas pipelines 196.2 138.5 Campo Duran LPG 141.1 112.1 Subtotal 440.0 250.6 Debottlenecking and EOR 118.9 79.9 Crude and products pipelines (Lujan de 168.8 125.1 Cuyo) 16.0 4.1 CNG 12.1 45.9 Technical assistance 46.8 13.9 Interest during construction Total 802.6 519.5 3.29 The estimated cost $802.6 million was to be financed by YPF/GdE/Government for $563.1 million (i.e. 70 percent), IDB (gas pipeline) for $59.5 million and the Bank for $180 million. While the Bank and IDB loans were mostly disbursed, local funding amounted to $135.4 million or 26 percent of the actual total cost, due to YPF's extremely difficult financial situation. The Bank was instrumental in mobilizing the Japanese Eximbank assistance for $175.7 million (i.e. 34 percent of total cost)45. Here again, as in the case of the Refinery project, overly optimistic assumptions had been made regarding YPF and the Government ability to finance the hydrocarbon sector. 45. Eximbank also financed part of the Refinery Conversion Project cost. 40 Results 3.30 The largest project component was the expansion of the Northern gas pipeline system including the enlargement of Campo Duran liquids plant and the expansion of a gas pipeline from Campo Duran (near Bolivia) to the Buenos Aires area. This project was successfully completed, although with substantial delays since it became operational in 1992 instead of 1987. 3.31 The cost of the Campo Duran plant and gas pipeline project components was $251 million against $337 million originally anticipated, a 25 percent saving. However, benefits from these components were also lower than anticipated. No ethane is produced because the petrochemical plant which was supposed to use it as raw material has not been built. Butane and propane are produced at higher volumes than anticipated (266,000 tons in 1994 against 165,000 tons forecast) but natural gasoline production is only about 103,000 tons compared to a forecast of 263,000 tons. Prices are also lower than expected. As a result, revenue from liquids was about $57 million in 1994 against $102 million expected at appraisal. 3.32 Another negative factor is a lower increase in gas utilization due to the fact that, although the Campo Duran facilities can process 17 million cubic meters/day, the pipeline to Buenos Aires capacity is 14 million cubic meters/day only. In addition gas demand is weak in the summer and reduces the volumes of gas which can be on average be processed. Since gas processed in 1985 was 5 million cubic meters/day and is not expected to go beyond 12.5 million/day, increased gas utilization is 7.5 million against 12.4 expected initially. The net flow of benefits over a 12-year period is thus much smaller than calculated at appraisal (ERR of 37 percent) and recalculated by the PCR (40 percent). The ERR is however still largely positive (about 25 percent). 3.33 The other major components included the Lujan de Cuyo refinery pipelines as well as debottlenecking sub components in La Plata and Lujan de Cuyo Refineries. The total cost was $205 million compared to a $288 million original estimated cost. The PCR shows a recalculated 42 percent ERR for the Refinery's pipeline. It is not practical46 to calculate the return on the numerous refinery sub projects but the largest sub project, ($25.6 million cost) at La Plata and Lujan de Cuyo, enabled YPF to increase the octane ratios of gasoline while largely eliminating lead, thus generating financial and environmental benefits. 3.34 Funds for the CNG component were only partly utilized by YPF but a network of CNG stations is now operated by independent dealers. Although positive results were achieved until 1992, high vehicle conversion and investment costs for CNG stations, as well as lower diesel price at the pump have slowed down CNG development. 3.35 As indicated above, GUTA funds have contributed to the financing of numerous experts and studies required to undertake the ambitious restructuring and privatization of YPF and Gas del Estado. This was an unintended outcome since the technical assistance originally included in the GUTA mainly aimed at financing management information systems, accounting energy planning and fields automatization. The technical assistance component was larger than for the Refinery Project ($12 million against $5.7 million) but original funds available for improving YPF's accounting, information systems, technical and commercial operations, etc. were relatively small. 46. The Staff Appraisal Report did not calculate rates of return for debottlenecking sub components. 41 3.36 One of GUTA's main objectives was to reestablish YPF's financial equilibrium and to improve its financial management and controls, and to strengthen the Government's capabilities for more comprehensive planning of energy use and development. The Bank thus required: (i) Government contributions to alleviate YPF external debt; (ii) the inclusion of financial ratio covenants in the loan agreement; and (iii) the condition that the Secretariat of Energy would undertake a wide-ranging Study of oil and gas major issues. The Bank used the leverage of GUTA to pursue a dialogue with YPF and, to a more limited extent, with the Government, in order to progressively bring reforms in YPF which would increase the Company's efficiency and profitability. Results were mixed however and during the first years of the project (1985-1989) improvements were limited, particularly in view of the difficult macro economic situation in Argentina during that period. GUTA was overtaken by events in 1989-1993 and an entirely, much more drastic approach (outright privatization of sector entities) was chosen by the Government, and endorsed by the Bank. As already mentioned (para 3.35), the redesigned technical assistance program financed under the GUTA made a significant contribution to the articulation and implementation of the Government's successful reform of the hydrocarbons sector. Correspondingly, institutional development under this project is assessed as substantial. 3.37 YPF's financial performance was reviewed earlier in this Report (paras 43-52). In 1991- 93, drastic measures were taken to financially restructure and finally privatize YPF while GUTA funds were still being disbursed. Supervision of YPF's financial performance was in fact done in the general PERAL framework in 1991-92 (cf. PAR of PERAL). 3.38 YPF net income before tax in 1993 was Pesos 734 millions (18.6 percent of net sales) compared to Pesos 256 million (6.5 percent of net sales) in 1992, an increase of 186.7 percent. Net income has evolved as follows: YPF net profits (Pesos million) 1989 1990 1991 1992 1993 1994 (September 30) (841) (576) 253 256 706 375 3.39 YPF has been able to meet the quick ratio since 1985 and debt/equity ratio since 1987 agreed upon under GUTA (see Table on Financial covenants in para 47). Sustainability 3.40 The Campo Duran production facilities have been expanded, modernized and sold to the private sector. The operation is profitable. The Northern pipeline is now operated by a new private transportation company (Northern Gas Transport Company), also very profitable. YPF's refineries (particularly Lujan de Cuyo) have increased efficiency, as a result of the debottlenecking sub components of the GUTA project. These results are likely to be sustainable in a deregulated and competitive context. 3.41 Sustainability of recent changes (to which GUTA contributed through the financing of consultants and studies) is also likely. Reforms in 1989-94 have almost totally deregulated the hydrocarbon industry and ended the monopoly of YPF. In the privatization process, YPF initially sold all its non-essential assets in what was defined as the "transformation process". That process started on January 1, 1991 and was completed by December 31, 1992. The second 42 stage was the "restructuring" necessary to make YPF a more profitable and competitive company. New systems and controls as well as modem accounting and reporting systems were implemented. A new labor agreement permitted a reduction of employees from over 50,000 in 1991 to less than 6,000 in 1995. A large initial public offering of YPF's stock in 1993 was very successful. YPF's capitalization was $9 billion on December 31, 1993 with 1993 sales of $4 billion and net profits $706 million. It seems unlikely that institutional improvements which permitted such performance would be seriously jeopardized in the years ahead. Bank Performance 3.42 At the design stage, Bank performance suffered from the fact that Bank guidelines for lending to the hydrocarbons sector were revised in 1984 with the result that the oil and gas development project identified in 1982 never materialized as anticipated. In 1985, the scope of the project was reduced to gas utilization and technical assistance. 3.43 Also at the design stage, Bank staff devoted a lot of attention to YPF's financial performance and even developed a financial model which was made available to YPF management to help them prepare cash flow and other financial projections in a high-inflation environment. 3.44 In the Spring of 1985, a Bank Public Investment Review mission identified a number of issues in the energy sector (including power) and made recommendations particularly on pricing and institutional aspects. The dialogue between the Bank and the Argentine authorities appeared to improve as a result. 3.45 Despite optimistic statements (cf. Minutes of Board meeting in June 1985) on petroleum prices adjustments, and opening of new acreages for private oil and gas exploration investment, little immediate progress was in fact made on these issues, particularly regarding prices. The GUTA Loan was thus renegotiated along with the Refinery Conversion Supplemental Loan and became effective in September 1986 only. Also around that time, as a result of the Bank's reorganization, a new task manager was appointed (mid-1987) and a project management unit was also created by YPF (October 1987). By then, loan disbursements had been minimal. 3.46 As had been the case with the Refinery Project, Bank staff contribution proved very useful on project construction and procurement aspects. But there was little or no financial supervision until end 1988. Subsequently, financial supervision was helped by progress achieved in YPF's accounting and organization. But the quality of financial supervision remained hindered by high inflation and Government interference. 3.47 Coordination with IDB took place through IDB's financing of the Campo Duran gas pipeline extension. However, IDB's efforts to agree on gas price increases with Gas del Estado (GdE) did not prove very successful until hydrocarbon prices were deregulated in 1990. 3.48 As indicated earlier, the Bank was instrumental in helping YPF to negotiate a loan from the Japanese Eximbank. When at a later stage, Eximbank temporarily suspended disbursements, the Bank showed great flexibility in accelerating its own disbursements, in effect providing "bridge financing" to YPF. 43 3.49 On the whole, Bank staff proved more aware of institutional and financial issues that under the Refinery Conversion project. By 1989 - 90, a number of sector studies were conducted directly by Bank staff or by consultants financed under the GUTA loan. These studies proved useful when PERAL was approved in 1991 and served as inputs for the privatization program which subsequently took place. However, the leverage gained by the Bank through GUTA per se remained, throughout the duration of the loan, insufficient to bring about drastic changes needed. Only the basic Government policy changes effected in 1991-93, and supported by PERAL, were able to achieve sustainable results. Accordingly, Bank performance under the GUTA is assessed as only marginally satisfactory overall.  45 4. Conclusions and Lessons 4.1 The issues that faced the hydrocarbon sector when the Refinery Conversion and the GUTA projects were identified and appraised in the late 70s and early 80s resulted from a combination of factors including: (i) Government interference; (ii) petroleum product and gas controlled prices; (iii) heavy taxes and royalty programs; (iv) regulated trade regime; and (v) lack of commercial orientation of YPF and GdE. 4.2 The centerpiece of the Bank's strategy at that time was to use the leverage of financing an agreed portion of YPF's medium term investment program (refineries, pipelines, natural gas development) to improve the company's efficiency, reduce Government interference in the sector, and strengthen the role of the private sector. 4.3 However, Bank project lending to YPF showed that isolated attempts at improving enterprise performance stood little chance of success because of distortions in the corporate environment. Complicated bureaucratic procedures in YPF and difficulties in contracting foreign consulting companies caused serious delays in project implementation. The GUTA loan approved in 1985 remained almost entirely undisbursed until 1989 because of complicated bidding procedures and other management problems. The program to set up cost centers was interrupted. An energy policy paper (required under the loan) was not finalized, the adjustment in petroleum product prices only partly carried out and YPF's investment program merely cut, not rationalized. 4.4 The main lesson is that a successful reform of YPF required a more frontal strategy to cause profound changes in contractual relationships with the Government, labor unions and YPF's customers and suppliers. Instead of influencing YPF's performance through technical assistance and financial ratios covenants (the "gradual approach" towards restructuring), the experience of these two investment projects has showed that Government policies had to be changed in order to effectively deal with the sector's basic issues of control, regulation and interference. 4.5 Partial results were obtained throughout the implementation of the physical components of the two projects but financial and institutional development objectives were not met and probably could not be met satisfactorily through specific investment projects in the then existing political and economic context. 4.6 The Refinery Conversion Project was implemented largely as a purely technical project and Bank staff felt almost totally unable to meaningfully influence YPF's management behavior and Government policies. The GUTA project was appraised when the direction of Bank policy turned to reduced assistance to state oil companies. Efforts were made to limit YPF investments and thus provide incentives for more private sector activity in exploration/development of oil and gas. But these efforts were only partially successful in the absence of YPF effective restructuring. The Government finally concluded in 1990 that a deregulation and privatization of the hydrocarbon sector was called for to mobilize the large amounts of investment required and to ensure their efficient allocation as an essential condition for reversing the decline of hydrocarbon production and reserves started in the mid 1980s. 46 4.7 The outcome of the Refinery Conversion Project, closed in 1989, is rated as unsatisfactory (as in the PCR) due to the very poor results achieved regarding YPF financial and institutional performance during the period of project implementation. The outcome of the GUTA project is rated as marginally satisfactory (as in the PCR) partly because more economically efficient physical components were implemented and partly because the Loan provided ample funds for experts and studies to bring about a deeper restructuring of the company. But such restructuring and ultimate privatization were not part of GUTA's relatively limited institutional objectives. It resulted from a basic change in Government policy regarding public enterprises management and ownership. Without such radical shift in Government policy, the GUTA loan by itself would most likely have failed in achieving the institutional objectives of improving the performance of YPF. 4.8 The limited results achieved by the two projects and the subsequent successful privatization of the Argentina hydrocarbon sector also point to the importance of: (i) a strong political will to proceed with largely economically based and justified proposals (e.g. price and trade deregulation, etc.); (ii) maintaining a constant dialogue with vested interest groups (which often opposed implementation of projects conditional ities); (iii) an appropriate legal and regulatory framework largely free from interference from above interest groups; and (iv) qualified and competent managers, supported by adequate financial and consultancy resources (such as those financed through the Gas Utilization Loan). Un rt TABLE I ARGENTINA Energy Consumption' (1988-1993) 1988 1989 1990 1991 1992 1993 % growth p.a. 1. Million tons of oil equivalent Petroleum Products 21.0 19.3 18.3 19.2 20.4 21.0 - Natural Gas 18.4 19.3 17.6 19.3 20.2 19.7 1.4 Coal 1.2 1.0 1.0 0.9 0.9 0.8 (5.9) Hydro and nuclear 5.9 5.0 7.2 6.7 8.0 9.1 9.1 Biomass 2.2 2.2 2.9 2.4 2.4 2.4 2.1 Total 48.7 46.8 47.0 48.5 51.9 53.0 1.72 11. Percent Distribution (%) Petroleum Products 43.1 41.2 38.9 39.6 39.3 39.6 Natural Gas 37.8 41.2 37.4 39.6 38.9 37.2 Coal 2.5 2.2 2.1 1.9 1.7 1.5 Hydro and nucicar 12.1 10.7 15.3 13.8 15.5 17.2 Biomass 4.5 4.7 6.3 4.9 4.6 4.5 Total 100.0 100.0 l00.0 100.0 100.0 100.0 Source: Energy Secretarial. M I Consumption is equal to Production + Imports L E.xports L stocks changes 2 GDP growth was about 2% ^per annum in 1988-1993 TABLE IT ARGENTINA Production of Hydrocarbons (thousand tons of oil equivalent) 1988 1989 1990 1991 1992 1993 % growth p.a. (1988-93) Crude Petroleum7 23 119 23 641 29 784 25 330 28 553 30504 5.7 Petroleum Products 22 074 23 060 23 205 23 799 24 809 24 939 2.5 Gasoline 4 855 5 509 5083 6054 6218 6339 5.5 Diesel / gas oil 7891 7825 8306 8703 9484 9516 3.8 0 Fuel oil 5 118 4 869 4651 3921 3 541 3 413 (5.9) Others 4210 4 857 5 165 5 121 5566 5671 6.1 Natural gas 18 587 19835 18762 20302 20602 20959 2.4 Source: Energy Secretariat. 7 I cubic meter is equivalent to 0.885 ton. TABLE IT ARGENTINA Petroleum Products3 Consumption (1988-1993) 1988 1989 1990 1991 1992 1993 % growth p.a. L Million tons Refinery gas 0.4 0.4 0.5 0.6 0.6 0.7 11.9 LPG4 0.9 1.2 1.3 1.4 1.5 1.3 7.6 Gasolines 4.3 4.6 3.7 4.4 4.8 5.2 3.9 Kerosene / (jt fucl) 1.3 1.2 1.3 1.1 1.2 1.3 - Gas oil / Diesel oil 7.7 7.1 6.9 7.1 7.9 7.9 0.5 Fuel oil6 5.4 3.7 3.3 3.8 3.3 3.7 (5.6) Coke 0.8 0.7 0.7 0.5 0.8 0.5 (6.6) Others4 0.2 0.4 0.6 0.3 0.3 0.4 0.5 Total 21.0 19.3 18.3 19.2 20.4 21.0 - 11. Percent Distribution (%) Refinery gas 1.9 2.1 2.7 3.1 2.9 3.3 LPG 4.3 6.2 7.1 7.3 7.4 6.2 Gasoline 20.5 23.8 20.2 22.9 23.5 24.8 Kerosene/jet fucl 6.2 6.2 7.1 5.7 5.9 6.2 Gas oil / Diescl oil 36.7 36.8 37.7 37.0 38.7 37.6 Fuel oil 25.7 19.2 18.0 19.8 16.2 17.6 Coke 3.7 3.6 3.8 2.6 3.9 2.4 Others 1.0 2.1 3.4 1.6 1.5 1.9 Total 100.0 100.0 100.0 100.0 100.0 100.0 Source: Energy Sccrcarial. Statistical Ycarbooks. 3 Excluding asphalt, lubricants and greascs. 4 Excluding petrochemical use. 5 Including aviation gasoline. 6Including heavy residuals. TABLIV Y ARGENTINA Crude oil and Petroleum products Trade Balance$ (Million tod)f 1988 1989 1990 1991 1992 1993 I. Volume Crude oil 0.41 0.61 0.84 1.05 2.71 4.31 Petroleum products Refinery gas - LPG 0.16 0.11 0.23 0.20 0.48 Gasoline 0.53 1.02 1.31 1.70 1.40 1.10 Kerosene/Jet fuel (0.16)? (0.03) (0.02) a Gas oil/Diesel oil (0.06) 0.92 1.48 1.31 1.76 1.52 0 Fuel oil (0.08) 1.06 1.07 0.02 0.23 (0.19) Coke 0.01 0.23 0.23 0.21 0.37 0.34 Others - - - Total petroleum products 0.36 3 1.39 4.60 3.44 3.96 3.23 II. Value (US S million) Petroleum products (198.1) 222.7 615.3 434.9 708.0 826.8 Cnde oil 35.9 71.7 1 15.6 131.4 341.01 504.7 Total (166.2) 294.4 730.9 566.3 1 049.6 I 331.5 Source: Energy Sccrclarial. Export include bunker sales. 9 Sign (-) means net imports. TABLE V ARGENTINA La Plata and Lujan de Cuyo Refineries Production 1988 1989 1990 1991 1992 1993 % growth p.a. Crude oil processed 13 563 14 440 14 848 15 297 16 103 15,4951o 2.7 (thousand cubic meters) Petroleum products (thousand cubic mccrs/Ions) Refinery gas (cubic meters) 271 305 349 428 n.a n.a. n.a LPG (Ions) 219 324 400 487 623 541 19.9 Gasoline (cubic meters) 3 381 3 287 4 241 4 607 4 846 4 722 6.9 Kerosene /Jet fuel (cubic meters) 777 760 858 726 737 810 0.9 Gas oil / Diesel oil (cubic meters) 4 678 4 940 5 090 5 640 6 107 5 836 4.5 Fuel oil (Ions) 3 255 2782 2 394 2 118 1 584 119 (9.9) Coke (tons) 679 788 830 790 1 015 1 089 9.9 Lubricants (cubic nclcrs) 164 127 90 ]01 106 131 (3.5) Asphalt (tons) 310 162 117 132 151 267 (2.7) Source: Energy Secretariat. o 10 Crude processed in 1994 = 12,744. 0 TABLE VI ARGENTINA La Plata Refinery Production 1988 1989 1990 1991 1992 1993 e growlh pat. SAR1 Crude oil processed 8 959 9652 9 353 9 479 9 442 8 72112 (0.3) (thousand cubic metcrs) Petroleum products (thousand cubic meters/tons) L Refinery gas (cubic meters) 116 140 156 209 n.a n.a n.a 157 LPG (tons) 97 138 181 254 363 264 22.0 292 Gasoline (cubic meters) 2 196 I 573 2 527 2945 3 184 2 960 6.1 946 Kerosene IJet fuel (cubic mcters) 549 653 624 549 538 600 1.8 - Gas oil / Diesel oil (cubic meters) 2 617 2 830 2830 3 277 3 213 2 929 2.2 435 Fuel oil (tons) 2 926 2 504 2 124 I 757 1 163 975 (10.8) 2 33913 Coke (tons) 247 353 388 337 499 528 16.4 492 Lubricants (cubic metcrs) 164 122 90 101 106 131 (3.7) n.a Asphalt (tons) 310 162 117 132 151 267 (2.7) n.a Source: Energy Secretarial. I Staff appraisal Repport. 1981 Annex 7-1, page 2. Data show projecied increases in production. 12 Crude processed in 1994 = 6,674. 13 processed as raw material TABLE VIT ARGENTINA Lujan de Cuyo Refinery Production 1988 1989 1990 1991 1992 1993 Increase % growth SAR'4 1988-93 p.a. Crude oil processed 4 604 4 788 5495 5 818 6661 6 7725 1 984 8.0 (thousand cubic meters) Petroleum products (thousand cubic metershons) Refinery gas (cubic meters) 155 165 193 219 n.a n.a na n.a 56 LPG (tons) 122 186 219 233 260 277 155 17.9 211 Gasoline (cubic meters) 1 185 1 327 1 714 I 662 1 662 1 762 477 8.3 593 Kerosene /let fuel (cubic meters) 228 211 234 177 199 210 (18) (1.6) 14 Gas oil / Diesel oil (cubic meters) 1 942 2 104 2 254 2 363 j 894 2 907 965 8.4 397 Diesel oil 119 7 6 - - (119) negative- - Fuel oil (tons) 329 278 270 361 421 344 15 0.9 162516 Coke (tons) 432 435 442 453 516 561 129 5.3 169 Lubricants (cubic meters) - - - - . - - - M Source: Energy Secretarial. 14 Staff appraisal Report. 1981. Annex 7-1, page 2. Data show projected increase in production. 15 Crude processed in 1994 = 6,069. 16 Raw matercal for processing TABLE VM > ARGENTINA Refining Capacity'7 Utilization Average 1988 1989 1990 1991 1992 1993 1994 utilization 1988-94 La Plata Capacity (cub. met.I/day) 37 000 35 400 32 000 32 000 32 000 32 000 32 000 33 200 Output (cub. met./day)IS 24 545 26444 25625 29622 25868 23899 18286 24898 Ln % capacity utilization 66.3 74.7 80.1 92.6 80.8 74.7 57.1 75.0 II. Lujan de Cuyo Capacity (cub. met./day) 20 500 20 500 19 000 19 000 19000 19 000 19 000 19 430 Output (cub.mict./day) 12614 13 118 15055 15940 18249 18553 16604 15733 % capacity utilization 61.5 64.0 79.2 83.9 96.0 97.6 87.4 81.0 111. Total I + 11 Capacity (cub. met./day) 57500 55900 51 000 51 000 51 000 51 000 51 000 52630 Output (cub.met./day) 37 159 39562 40680 45562 44 117 42452 34890 46631 % capacity utilization 64.6 70 8 79.8 89.3 86.5 83.2 68.4 77.2 Source: Encrgy Secrclariat and YPF. 1 Atmospheric distillation. 1 Crude processed per day - 365 day/year. T:AB,E TX ARGENTINA Crude oil and petroleum products prices 1994 SAR19 1994 1989 1990 1991 1992 1993 1994 (index forecast (index 1989=100) SAR=100) Crude oil (S/barrel)20 21.10 24.47 21.48 20.56 18.44 17.19 81.5 (West Texas Intcrmedia(e) Petroleum products ($/Ion)21 Refinery gas 84.37 97.84 85.89 82.21 78.12 76.85 91.1 352.00 21.8 Z LPG 166.67 193.29 169.67 162.41 160.59 16450 99.9 342.00 46.7 Regular gasoline22 263.15 305.18 267.89 256.42 235.73 198.38 75.4 373.00 53.2 Premium gasoline27 214.62 248.90 218.49 209.13 262.45 197.82 92.2 385.00 51.6 Kerosene/jet fuel 193 31 224.18 196.79 188.36 198.28 171.45 88.7 360.00 47.6 Gasoil 179.58 208.26 182.81 174.98 179.66 160.02 89.1 342.00 48.5 Fuel oil 56.33 65.33 57.35 54.89 56.36 50.20 89.1 190.00 28.4 Coke 20.58 23.86 20.95 20.05 18.03 12.81 62.2 375.00 3.4 Source: YPF. '9 Approval Report dated June 15, 1981. X 20 Benchmark Crude. Depending on gravity (API) and sulfur content, YPF transfer prices are about 20% lower. 21 Ex-relinery price. 2 Unleadcd. Annex A 56 TABLE X APF MARKET SALES (1992-1993) (Thousand cubic meters) 1992 1993 YPF Total YPFYPF Total YPF (%) YF Ttl (%) Aviation gasoline 22 22 100.0 12 12 100.0 Gasoline (regular) 1 388 2 421 57.3 1 198 2 196 54.6 Gasoline (premium) 1 919 3 882 49.4 2 059 4 269 48.2 Solvents 3 44 6.8 - 43 - Kerosene 385 500 77.0 337 464 72.6 Jet fuel 497 892 55.7 527 905 58.2 Gas oil 4685 8327 56.3 4803 8820 54.5 Diesel oil 1 77 1.3 - 76 - Fuel oil (tons) 1 039 1 647 63.1 393 1108 35.5 Lubricag 108 245 44.1 113 282 40.1 Asphalt 169 303 55.8 259 417 62.1 Coke 172 342 50.3 286 583 49.1 LPG 591 1 446 40.9 721 1 216 59.3 Total 10 979 20 148 55.5 10 708 20 305 52.7 Source: Energy Secretariat. TABLE XI ARGENTINA Refinery Conversion Project Final Cost US $ million Local Foreign Total YPF IBRD EXIM-JAPAN I. Refinery Conversion scheme License & Engineering 28.71 41.30 70.01 27.27 41.03 1.71 W Equipment & Materials 219.70 102.76 322.46 137.12 109.78 75.56 Erection 164.50 0.00 164.50 35.58 85.15 47.78 Civil Works 88.80 0.00 88.80 19.70 47.76 21.34 Construction supervision 10.12 0.00 10.12 6.44 0.00 3.69 Start Up 0.64 6.33 6.97 0.19 6.01 0.77 Total installed cost 512.47 150.39 662.86 226.30 289.73 146.84 Working capital 310.73 - 30.73 30.73 - - Interest during construction - 110.02 I toe- 110.02 - - Total conversion scheme 543.20 260.41 803.61 367.04 289.73 146.84 11. Plant operations improvement 96.34 20.0) 116.34 44.53 25.21 46.60 III. Financial Management - - IV. Training - 0.20 0.20 - 0.20 - V. Industrial Encrgy Audit - - - - - - VI. TotalProjcct cost 639.54 280.61 920.15 411.57 315.14 193.44 S Source: YPF TABLE XII GUTA - Economic Analysis of Campo Duran Gas Liquid Recovery (Thousand US S) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2001 20 2002 2003 Outflows Investmentsi 589 1551 39025 48261 1611622 Operating cost 12000 15000 I5000 I5000 15000 15000 I50(00 I500(0 15000 15000 15000 15000 Inflows Revenue from liquids 32700 46200 56600 Decrease of flaring 6100 9300 9800 Increase gas utilization 21000 31600 33400 Total outflows 589 1551 39025 48261 161162 12000 15000 15000 Un Total inflows 59800 87100 99800 O Net cash flow (589) (1551) (39025) (48261) (161162) 47800 72100 84800 Assumptions Gas liquids (thousands tonl)T) Propane 100 141 168 Butane 56 79 98 Natural gasoline (m3) 54 78 103 Decrease flaring (MM m3) 145 220 230 Increase gas utilization (MMCFD) 183 275 290 Price Assumptions (Iq q it Propane (Shon) 180 Butane ($/ton) 180 Natural gasoline ($/m3) 85 Depletion Value of Natural ga( (S thousand/m3) 4.243 Value of fuel oil replaced ($/n3) 1 154 Nola: 1994 outflows and inflows have been projected for 1992-2003 to calcultate economic rate of rcturn Enlargement Campo Duran liquid recovery plant (separators, xp.ussion existing facilities, oil and gas gatiering pipelines, field dcvelopmntcu) and Nurtlm Pipeline expansion. 2 Total 1987-91 - 250,388. 3 Value ofdecrcase flowing is obtained by multiplying the decrease in volume orgas flowed by the depletion value ofS 4.24/103m3 4 Value ofincreased gas utilization is calculated by multiplying the volume ofincrease by value offuel oil replaced PLANTA REFINOR (CUENCA NOROESTE) GAS LICUADO Y GASOLINA PRODUCIDO En toneladas n3 AO PROPANO BUTANO TOTAL GASOLINA 1.993 141.107 78.673 219.780 78.301 ko 1.994 168.126 97.845 265.971 102.921 1.993 Gas Natural Procesado 10.950.000 m3/día Promedio 1.994 Gas Natural Procesado 13.248.000 m3/día Promedio POIM.IG.XLS 24.295 F«cha de Aclodiiatií-     i A,: N :7 Typ:EPEAR