Equatorial Guinea - Second Petroleum Technical Assistance Project

Document of The World Bank Report No.: 24430 PROJECT PERFORMANCE ASSESSMENT REPORT EQUATORIAL GUINEA SECOND PETROLEUM TECHNICAL ASSISTANCE PROJECT (CREDIT 2408-EG) July 1, 2002 Sector and Thematic Evaluation Group Operations Evaluation Department  Currency Equivalents (annual averages) Currency Unit = CFA Franc (FCFA) Exchange Rate at Project Appraisal (March 1992): US$1= FCFA 275 Exchange Rate at Completion (January 1997): US$1 = FCFA 520 Exchange Rate as of March 2002: USS1 = FCFA 710 Abbreviations and Acronyms Bbl Barrel Bcf Billion cubic feet Bpd Barrels per day DH Directorate of Hydrocarbons ES Evaluation Sunimary FDI Foreign direct investment FPSO Floating production, storage, and offloading FPU Floating production unit FSO Floating storage and offloading unit GEPSA Guinea-Espanola de Petroleo S.A. GE-Total Guinea Ecuatonal-Total KgOE Kilogram of oil equivalent LPG Liquefied petroleum gas Mmb Million barrels of oil Mmcf Million of cubic feet Mmcfd Million cubic feet per day Mmcm Million of cubic meters MME Ministry of Mines and Energy (formerly Ministry of Mines and Hydrocarbons) MMH Ministry of Mines and Hydrocarbons MOP Memorandum of the President PSC Production Sharing Contract Tcf Trillion cubic feet Measures and Equivalents One barrel about 0.16 cubic meter One cubic foot 0.028 cubic meter One cubic meter 37.3 cubic feet Fiscal Year Government: January 1 to December 31 Director-General. Operations Evaluation Mr. Robert Picciotto Director, Operations Evaluation Department : Mr. Gregory Ingram Manager, Sector and Thematic Evaluation : Mr. Alain Barbu Task Manager : Mr. Andres Liebenthal  The World Bank Washington, D.C. 20433 U.S.A Office of the Director-General Operations Evaluation July 1, 2002 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Assessment Report on Equatorial Guinea Second Petroleum Technical Assistance Project (Credit 2408 EG) Attached is the Performance Assessment Report prepared by the Operations Evaluation Department on the above project. The Credit of SDR 1.8 million was approved in FY93, closed in FY97, and was fully disbursed. The project objectives were to: (a) ensure that the Borrower received maximum and sustainable revenues from the production of the Alba gas and condensate field; (b) identify the most cost effective methods to utilize the associated gas from Alba; (c) minimize the risks for the environment of Alba's operations; (d) improve the efficiency of energy sector institutions; and (e) strengthen the capacity of the Ministry of Mines and Hydrocarbons to monitor the activities of oil companies, and to evaluate the supply and pricing systems for petroleum products. The project's outcome is rated as moderately satisfactory, on account of progress made since project completion in 1997 towards meeting project objectives in a number of areas that were and are still considered as highly relevant and were supported under the project: the 1981 Hydrocarbon Law was amended in 1998, subsequent contract renegotiations took place, which improved the Government' s share; and imports and distribution of petroleum products were privatized and liberalized. Although the changes differed on some points from the proposals prepared under the project, Project efficacy is rated as modest. Furthermore, since 2000, associated with the resumption of Government dialogue with the IMF and the Bank, there has also been progress towards better accounting of oil revenues and systematic audits of oil companies financial accounts, which were advocated under the project. Project efficiency has further improved as there have been further considerable increases in oil revenues: objectives related to the Alba field were met substantially beyond appraisal expectations, and considerable additional revenues accrued from the much larger Zafiro field, the supervision and monitoring of which received considerable attention from the project. Consequently, with relevance rated high, efficiency substantial, and efficacy rated as modest the outcome is now rated as Moderately Satisfactory. However, sector institutional capacity, albeit improved, remains weak. Sustainability has been rated as Likely. The project contributed to the adoption of sound long-term development plans in the development of the oil sector. Benefits from current oil activities are expected to be sustained at least for the next fifteen years and further oil field findings are likely. Equatorial Guinea is now an attractive FDI destination in Africa. There are, however, still uncertainties regarding the Government's commitment or ability to manage oil wealth well and ensure long-term institutional, environmental, economic and social sustainability of oil development. Both Bank and Borrower performances are rated as unsatisfactory. Despite the moderately satisfactory outcome, Borrower performance during the project implementation period is rated unsatisfactory (though marginally so) principally on account of poor project  2 management and lack of transparency. Bank performance was unsatisfactory because, while the Bank insisted that existing exploration contracts were too favorable and should be re-negotiated, it ignored the dilemna this posed to the Govemment and failed to engage in a more constructive and balanced dialogue with the Government on this issue. Furthermore, supervision was very limited and the Bank failed to react strongly to overdue audits, inadequate project accounting, and failure by the Govemment to comply with the covenant requiring transparency in budgeting of oil revenues. Institutional Development Impact is rated as modest. The experience from this project confirms a number of OED lessons: * As soon as significant discovenes are made, important issues arise associated with the impact and distribution of oil wealth, which need to be addressed rapidly through the Bank-country dialogue to ensure long-term sustainability. These include the fundamental issues of national and sectoral environmental regulations and their enforcement capacity, budget transparency and allocation, strategies for public expenditures, pace of new licensing and development, savings mechanisms. and distribution of oil proceeds between the various levels of government. In the case of Equatorial Guinea, the Bank raised these issues in 1998, but only after the project was completed, and at a time of tense relations. * If the country is facing strong macro-economic constraints in the early stages of oil development, the Bank might consider supporting the adoption of policies and strategies leading to the proper management of oil wealth through adjustment or sector loans. * If the government must give especially favorable terms to attract the first investors to explore new territory for oil and gas, negotiated contracts need to incorporate time and geographical limits on those terms. * Whenever the implementing agency does not have the capability to manage the project (including accounting and reporting), efficient implementation requires that appropriate provisions to contract outside expertise for that purpose be incorporated in project design Attachment  OED Mission: Enhancing development effectiveness through excellence and independence in evaluation. About this Report The Operations Evaluation Department assesses the programs and activities of the World Bank for two purposes: first, to ensure the integrty of the Bank's self-evaluation process and to verify that the Bank's work is producing the expected results, and second, to help develop improved directions, policies, and procedures through the dissemination of lessons drawn from experience. As part of this work, OED annually assesses about 25 percent of the Bank's lending operations. In selecting operations for assessment, preference is given to those that are innovative, large, or complex; those that are relevant to upcoming studies or country evaluations; those for which Executive Directors or Bank management have requested assessments; and those that are likely to generate important lessons. The projects, topics, and analytical approaches selected for assessment support larger evaluation studies. A Project Performance Assessment Report (PPAR) is based on a review of the Implementation Completion Report (a self-evaluation by the responsible Bank department) and fieldwork conducted by OED. To prepare PPARs, OED staff examine project files and other documents, interview operational staff, and in most cases visit the borrowing country for onsite discussions with project staff and beneficiaries. The PPAR thereby seeks to validate and augment the information provided in the ICR, as well as examine issues of special interest to broader OED studies. Each PPAR is subject to a peer review process and OED management approval. Once cleared internally, the PPAR is reviewed by the responsible Bank department and amended as necessary. The completed PPAR is then sent to the borrower for review; the borrowers' comments are attached to the document that is sent to the Bank's Board of Executive Directors. After an assessment report has been sent to the Board, it is disclosed to the public. About the OED Rating System The time-tested evaluation methods used by OED are suited to the broad range of the World Bank's work. The methods offer both rigor and a necessary level of flexibility to adapt to lending instrument, project design, or sectoral approach. OED evaluators all apply the same basic method to arrive at their project ratings. Following is the definition and rating scale used for each evaluation criterion (more information is available on the OED website: http://worldbank.org/oed/eta-mainpage.html). Relevance of Objectives: The extent to which the project's objectives are consistent with the country's current development priorities and with current Bank country and sectoral assistance strategies and corporate goals (expressed in Poverty Reduction Strategy Papers, Country Assistance Strategies, Sector Strategy Papers, Operational Policies). Possible ratings: High, Substantial, Modest, Negligible. Efficacy: The extent to which the project's objectives were achieved, or expected to be achieved, taking into account their relative importance. Possible ratings: High, Substantial, Modest, Negligible. Efficiency: The extent to which the project achieved, or is expected to achieve, a return higher than the opportunity cost of capital and benefits at least cost compared to alternatives. Possible ratings: High, Substantial, Modest, Negligible. This rating is not generally applied to adjustment operations. Sustainability: The resilience to risk of net benefits flows over time. Possible ratings: Highly Likely, Likely, Unlikely, Highly Unlikely, Not Evaluable. Institutional Development Impact: The extent to which a project improves the ability of a country or region to make more efficient, equitable and sustainable use of its human, financial, and natural resources through: (a) better definition, stability, transparency, enforceability, and predictability of institutional arrangements and/or (b) better alignment of the mission and capacity of an organization with its mandate, which derives from these institutional arrangements. Institutional Development Impact includes both intended and unintended effects of a project. Possible ratings: High, Substantial, Modest, Negligible. Outcome: The extent to which the project's major relevant objectives were achieved, or are expected to be achieved, efficiently. Possible ratings: Highly Satisfactory, Satisfactory, Moderately Satisfactory, Moderately Unsatisfactory, Unsatisfactory, Highly Unsatisfactory. Bank Performance: The extent to which services provided by the Bank ensured quality at entry and supported implementation through appropriate supervision (including ensuring adequate transition arrangements for regular operation of the project). Possible ratings: Highly Satisfactory, Satisfactory, Unsatisfactory, Highly Unsatisfactory. Borrower Performance: The extent to which the borrower assumed ownership and responsibility to ensure quality of preparation and implementation, and complied with covenants and agreements, towards the achievement of development objectives and sustainability. Possible ratings: Highly Satisfactory, Satisfactory, Unsatisfactory, Highly Unsatisfactory.   Contents Principal Ratings ............................................................v Key Staff Responsible ..............................................................v Preface ............................................................ vii Background .............................................................1 Objectives and Design ............................................................2 Implementation .............................................................3 Outcome .............................................................4 Ratings .............................................................4 Relevance: High ..............................................................4 Efficacy: Modest ............................................................. 5 Efficiency: Substantial ..............................................................6 Institutional Development Impact: Modest .............................................................. 8 Sustainability: Likely .............................................................8 Bank Performance: Unsatisfactory .............................................................9 Borrower Performance: Unsatisfactory ............................................................ 10 Lessons ............................................................. 11 Annex A. Basic Data Sheet ............................................................ 12 Annex B. Historical Development of Gas and Oil Exploration and Production .................... 15 Annex C. Table of Objectives and Components ............................................................ 19 This report was prepared under the supervision of Andres Liebenthal (task manager) by Dominique Babelon and Charles Dahan (consultants), who assessed the project in March 2002. The report was edited by William Hurlbut and Soon-Won Pak provided admrnistrative support.   Principal Ratings ICR* ES* PPAR Outcome Unsatisfactory Marginally Unsatisfactory Moderately Satisfactory Sustainability Likely Uncertain Likely Institubonal Partial Modest Modest Development Impact Bank Performance Satisfactory for preparation, Unsatisfactory Unsatisfactory otherwise Deficient Borrower Performance Satisfactory for preparation, Unsatisfactory Unsatisfactory otherwise Deficient * The Implementation Completion Report (ICR) is a self-evaluation by the responsible operational division of the Bank. The Evaluation Summary (ES) is an intermediate OED product that seeks to independently verify the findings of the ICR. Key Staff Responsible Project Country Director Division Chiefl Task Sector Director Manager/Leader Appraisal Michael Gillette lain T. Christie Han Bhat Completion Serge Michailof Mark Tomlinson Angel Baide   vii Preface This is a Project Performance Assessment Report (PPAR) on the Equatorial Guinea Second Petroleum Technical Assistance Project, for which IDA approved a credit (Credit 2408-EG) for SDR 1.8 million, US$2.622 million equivalent, on July 2, 1992. The credit closed as scheduled on June 30, 1997. This report is based on the Implementation Completion Report (ICR) prepared by the Africa Region (Report no. 17954, June 5, 1998), the Memorandum and Recommendation of the President (Report no. P5808, June 10, 1992), the Credit Agreement, project files, economic reports from the Region and other organizations, and discussion with Bank staff. An Operations Evaluation Department (OED) mission visited Equatorial Guinea in March 2002 to review the long-term impact of the project and discuss the project results and effectiveness of the Bank's assistance with representatives of the govemment, oil companies, donors, and local authorities. The cooperation and assistance of current and former govemment officials in the Ministries of Planning and Economic Development, Mines and Energy, and Health, are gratefully acknowledged. Five years after project completion, this PPAR seeks to validate previous ratings of the project in light of events since completion and to assess the longer-term economic, social, institutional, and environmental sustainability and impact of the activities supported by the project. More specifically, the PPAR seeks to assess whether the project (a) contributed to the efficient development of the country's oil and gas resources and helped attract private sector investments; (b) contributed to improved govemance and transparency in the accounting and distribution of oil rents and in the management of the energy sector (including petroleum product imports); (c) contributed to a fair distribution of oil benefits and costs between the govemment and oil companies; (d) had significant environmental and social impacts; and (e) complied with the Bank's safeguard policies. Following standard OED procedures, this draft PPAR was sent to the borrower for comments before the final version is sent to the Board. But, none were received.   BACKGROUND 1. Equatorial Guinea is a small, sparsely populated country, spread over several islands (the largest being Bioko island, with the capital city, Malabo) and mainland territories (Rio Muni) located between Gabon and Cameroon. Total population in 2002 was estimated at about 475,000. Equatorial Guinea gained its independence in 1968. During the following eleven years, until 1979, the country was ruled by a harsh military dictator who brought the country into substantial decline. The educated elite fled the country or was killed. In 1980, EG was a very poor rural economy having lost competitive advantage in export crop and in complete need for economic rehabilitation. The generally poor educational level and training of the generation currently accounting for most of the labor force is still a serious constraint to development. There is a widespread lack of institutional capacity and competence in all sectors, and therefore high dependency on outside technical assistance and on donors. 2. The World Bank became involved in Equatorial Guinea's oil sector 12 years before the signing of the project's Credit Agreement. In 1980, the government sought technical assistance from UNDP and the Bank to attract the oil industry in the exploration for petroleum of the country's sedimentary basins. In July 1981 and July 1983, UJNDP granted two technical assistance credits, which were executed by the Bank, and which resulted in the preparation and enacting of a Hydrocarbon Law and model Production Sharing Contract (PSC) in 1981. These grants were complemented by an IDA credit for the first Petroleum Technical Assistance Project (Credit 1304-EG, of SDR 2.3 million), which was approved on November 30, 1982. That project aimed to promote petroleum exploration, strengthen the government's technical capability to monitor exploration activities carried out by oil companies, help the government in its negotiations with oil companies, and help prepare an energy database. 3. In 1983, GEPSA (a joint venture company between Hispanoil, later-on renamed REPSOL, and the Government), discovered the Alba gas and condensate field offshore from Bioko, but the operator considered the field marginal and lost its rights to the field in February 1990. Other contractors had also drilled unsuccessfully in other areas. In an attempt to salvage the development of the Alba field, IDA introduced representatives of the govemment to a few independent oil companies. These contacts resulted in a new exploration/production contract in May 1990 with an independent producer. It became apparent soon after that the terms of the 1981 Hydrocarbons Law, and the PSC were excessively generous to the operator and might lead to inefficient development. Low-cost field development started in January 1992, aiming at recovery of condensates only, with all associated natural gas being flared. 4. The Second Petroleum Technical Assistance Project was approved shortly after, in July 1992. Given (a) disappointing results of past exploration efforts, (b) what was identified at appraisal as wasteful use by the operator of Alba's limited resources, and (c) the resulting negative impact on the environment, the second project focused on optimizing the use of Alba gas and on domestic energy use. It also included some essential sector-wide technical assistance and institution building components and conditions to ensure that the government would get its fair share of production in future exploration findings and properly account for revenues. 5. Major developments in the oil sector started three years later in 1995, well into project implementation. UMC/Exxon-Mobil discovered the Zafiro-Topacio oil field in Block B under a PSC signed in 1992 with terms similar to those of Alba. Developments further accelerated since 1999, with important new oil discoveries offshore from Rio Muni (Ceiba field) since 1999. More is also expected elsewhere, as a number of other licenses have been granted since 1999. Total production of oil and condensates in the country has increased, from 3,000 bpd in 1992, to 6,500  2 in 1996, and 221,000 in 2000,' and production is expected to further increase to over 270,000 bpd in 2002, and be sustained at 300,000-400,000 bpd over the next 15 years. Proven oil reserve estimates have gone up from less than 400 million barrels in 1997 to levels conservatively estimated in 2001 at close to one billion barrels. Gas reserves at Alba have increased, from 535 billion cubic feet in 1992 to an estimated 8 trillion cubic feet in 2001. The historical development of production and reserves is presented in Annex B. 6. Developments since 1996 have had a major impact on Equatorial Guinea's economy. GDP increased from US$ 152 million in 1993 to USS498 million in 1997 and to US$ 1.4 billion in 2000. GDP per capita has increased from US$407 in 1993 to US$950 in 1997 and an estimated US$2,100 in 2000. The oil sector, which accounted for 11 percent of GDP in 1993, increased to 66 percent of GDP in 1997 and 86 percent of GDP in 2000. Oil revenues accruing to the government grew from about US$3 million per year in 1993 to US$50 million in 1997 and an estimated US$212 million in 2000 (they may reach US$725 million by 2003). This recent boom has resulted in visible infrastructure improvements, increased migration to the capital city, Malabo (straining available infrastructure and social services), and very fast growth of activities related to oil activities. Given very serious capacity constraints, the challenge for the govemment remains how to effectively collect its due share of oil revenues and manage these resources so that they benefit the majority of the population as well as future generations. OBJECTIVES AND DESIGN 7. The project objectives were to: (a) ensure that the borrower received maximum and sustainable revenues from the production of the Alba field; (b) identify the most cost-effective methods to utilize the associated gas from Alba; (c) minimize the nsks for the environment of Alba's operations; (d) improve the efficiency of energy sector institutions; and (e) strengthen the capacity of the Ministry of Mines and Hydrocarbons (later the Ministry of Mines and Energy, or MME) to monitor the activities of oil companies, and to evaluate the supply and pncing systems for petroleum products. 8. To achieve these objectives, the project included studies, technical assistance, training, and rehabilitation of the ministry building and acquisition of field vehicles. Annex C presents the project objectives, detailed associated components, together with achievements, outputs, and outcomes. Technical assistance for the revision of the petroleum exploration and production framework, and for negotiating new contracts or renewal of existing contracts with the oil industry, were among the important components of the project. 9. The project design included the following main actions as covenants in the Credit Agreement: * The government would, starting 1993, enter all revenues derived from the exploitation of the Alba field or other hydrocarbon accumulations into its annual budget. * By November 30, 1992, the government would agree with IDA on an action plan, based on the recommendations of studies, to develop a program for the use of Alba gas. * The borrower would carry out an Environmental Impact Study for Alba operations and agree with IDA on an action plan. 10. The somewhat different formulation of the project objectives in the Memorandum of the President (MOP), its Technical Annex, and the Credit Agreement, creates some confusion about 1. Excluding 19,000 bpd of methanol  3 the relative importance of the various objectives.2 Nevertheless, while in retrospect project objectives appear to have a narrow focus on resolving Alba issues, project design also provided means and opportunities to address wider sector issues, as well as those arising from exploration and operation of additional fields. Therefore project design was satisfactory overall. IMPLEMENTATION 11. The project closed as scheduled on June 30, 1997. Project funds were fully utilized. Technical assistance was provided to assist the Government to monitor activities of oil companies, review development plans proposed by them, audit their financial accounts, review the petroleum legislation and prepare detailed regulations, negotiate new contracts, renegotiate existing contracts and establish a data filing and statistical system. Training was provided to MME staff, mainly in technical aspects of petroleum exploration, drilling and production. A number of studies were prepared (optimal depletion strategy for the Alba field reservoir; gas utilization study for Alba; energy sector reorganization; petroleum products supply and distribution; and rehabilitation and expansion of the electrical system). Finally, an environmental impact assessment of Alba's facilities was carried out. Additional details on these activities is provided in Annex B. 11. Project implementation was affected by the following events: * The macroeconomic situation of the country during implementation was not good, leading the government to default often on its debt payment obligations to the Bank. This led to suspensions of disbursements. Furthermore, Bank-country relations were tense, because of general poor performance of most ongoing Bank projects, perceived weak governance, and lack of transparency. * Equivocal agreement on project objectives between the government and the Bank resulted in misunderstanding and friction. According to the ICR, the Bank understood that an implicit objective of the project was to renegotiate the Alba contract. This turned out not to be an immediate priority for the government, which rightly viewed renegotiation of signed contracts as legally difficult, untimely, and risky (it would undermine investors' confidence and drive away potential new partners in the sector). In need of immediate resources, the government preferred in the short term to negotiate financial advances on future revenues with the operators of Alba and Zafiro. * The project emphasis shifted after 1995, owing to rapid increase in oil sector activities following the discovery of oil in the Zafiro field, which considerably increased demands on government institutions for review and negotiations of annual production plans and supervision of exploration and production operations. * The Alba field operator changed in 1995, owing to pressure on the original operator to implement measures recommended by the environmental impact assessment and the gas utilization study. Walter International sold all its rights to CMS-NOMECO, which adopted a much longer-term development strategy and invested heavily in field development, minimization of gas flaring through downstream use of gas (processing into LPG, methanol, and power generation), and re-injection. Early in 2002, CMS/NOMECO in turn sold all its rights to Marathon, the main partner and operator of the methanol plant. 2. The PAR, like the ICR, adopted the objectives and components as stated in the Credit Agreement.  4 OUTCOME 13. Project objectives related to the optimization of Alba's field development and gas utilization were substantially achieved and efficiently so. The contract was eventually re- negotiated to conform to the 1998 Amendment to the Hydrocarbon Law (referred to below), and subsequent developments in the field and downstream (which were recommended under the project) surpassed appraisal expectations, resulting in much higher absolute benefits to the country. However, the objectives related to the Alba field became less relevant during implementation (after discovery of the Zafiro field) and after completion, as other much larger fields were discovered (Ceiba field, offshore Rio Muni). 14. During implementation, as new licenses were granted and substantial discoveries were made, the project's institutional and sector policy objectives gained considerable more importance and urgency. Achieving these objectives required the Govemment to take a series of actions in line with the recommendations of the studies and technical assistance financed under the project. These actions included enacting changes to improve the legal and contractual framework; issuing environmental and other detailed regulations; auditing oil companies accounts and recoverable costs on a systematic basis; further building up MME's capacity to effectively monitor a growing number of oil companies; reorganizing the energy sector; and liberalizing petroleum product imports and distribution. By completion, however, most of these objectives had not been achieved. Furthermore, the Government was not in compliance with the budget transparency covenant. The project outcome was therefore rated unsatisfactory in the ICR. 15. Subsequently, there were advances in the institutional framework, in particular, the 1981 Hydrocarbon Law was amended in 1998; contract renegotiations took place, which improved the govemment's share; and imports and distribution of petroleum products were privatized and liberalized. Although the changes differed on some points from the proposals prepared under the project, these actions justify an upgrading of the efficacy rating from negligible to modest. With relevance still rated high, efficiency substantial, and efficacy now rated modest, outcome is now rated moderately satisfactory, although the case for this upgrading is marginal. RATINGS Relevance: High 16. Given the rapid development of the oil sector since 1995 and its overwhelming importance in the economy and government revenues today, the project objectives were and are still highly relevant and consistent with government priorities and Bank objectives.3 While the various project objectives did not change during implementation, their relative importance did, with those associated with the optimization of the Alba field losing importance when the Zafiro field and other discoveries were made. Sector-wide objectives, including institutional strengthening, policy framework, environment and safety, and transparency objectives become more urgent to achieve. This change in prionties was recognized, and the project allocated funds for additional technical assistance to negotiate and supervise annual exploration and production 3. Equatorial Guinea currently has no Country Assistance Strategy, but in 1998, the Bank prepared an economic strategy note ("The Challenge of Sudden Wealth," Economic Strategy Note, February 6, 1999) that was discussed with the authorities and incorporated their comments. This strategy, which is still valid, highlights the critical importance of the oil sector to Equatorial Guinea's economy and emphasizes the need for the government to show a concrete commitment to improved financial management, especially greater transparency in the accounting, recording, and allocation of oil resources and their use for poverty alleviation  5 programs with the Zafiro contractor; prepare amendments to the Hydrocarbon law, model of PSC's and detailed regulations; and for additional capacity building in MME. Efficacy: Modest 17. Five years after completion, it appears that, with respect to the Alba field, project objectives were substantially achieved, but those for sector policy were only partially achieved. 18. The objectives of improvement of operations in Alba field were substantially achieved: (i) gas flaring from Alba was practically eliminated through conversion into LPG, methanol, and power generation, and through reinjection; (ii) environmental objectives were substantially achieved (see Box 1); (iii) the objective of ensuring maximum revenues from the field to the Govemment was also substantially achieved as a result of increases in production of condensates much above appraisal estimates; additional revenues generated from downstream processing of gas; and readjustment of contractual terms after amendment of the Hydrocarbon Law in 1998. The project contributed to the beneficial change of operator in 1995, leading to sound long-term field development and to a considerable expansion of Alba gas reserves and production. These achievements are expected to be further enhanced with another change of operator in 2002. 19. The objectives of transparency and institutional development (i.e. capacity building and sector institutional strengthening) were only partially achieved. During project implementation, when, in 1996/97, the Zafiro-Topacio complex was developed in a record time, an important achievement of the project was the provision of critical assistance for the Govemment to perform its monitoring and control functions. Since completion, there have been positive developments, which can be credited to the project, at least in part. Eventually, the technical assistance financed under the project provided inputs into the govemment successful renegotiation of the PSC for Zafiro-Topacio in March 1998, and subsequently of other contracts, including that of Alba, and to the amendment of the Hydrocarbon Law and model PSC in November 1998. In fact, the govemment chose to retain one of the technical assistance firms financed under the project as official technical adviser to the MIME, to provide ongoing assistance m exploration and production matters. In line with the recommendations of the study carried out under the project, the framework for petroleum product import, storage, and distribution was liberalized after project completion and the facilities were privatized. Draft environmental regulations prepared on the basis of recommendations by the project consultants have been submitted by MME to the Ministry of Environment. 20. Despite these achievements, efficacy overall remains modest, particularly on the most relevant objectives. First, the Hydrocarbon Law and model PSC were amended, but the improved contractual framework still remains generous to operators compared to Equatorial Guinea's neighbors4. Second, detailed regulations have still not been enacted. Third, draft environmental regulations were submitted to the Ministry of the Environment, but these have yet to be reviewed and enacted, and the ministry lacks capacity to enforce them when enacted. Fourth, the transparency covenant, that all revenues derived from the exploitation of the Alba field or other hydrocarbon accumulations should be entered into the annual budget, had not been met by the closing date. Fifth, staff training and technical assistance did significantly improve MME's capacity and efficiency in promoting and monitoring oil exploration and production activities, but not to the extent required to keep up with the subsequent rapid increase in petroleum activities. 4. A Bank Economic Strategy Note for Natural Resource Management ("The Challenge of Sudden Wealth"), dated February 26, 1999, reviewed the contractual framework and concluded that total govemment take was still substantially below levels in neighboring countries.  6 Large salary differentials between the civil service and oil companies5 and the private sector, combined with promotions of qualified staff to other positions in the government, have also further exacerbated shortages of trained personnel. Sixth, the training program financed under the project was not carried out on the basis of a systematic needs assessment: it tended to emphasize immediate needs for training in technical aspects of exploration and production, but gave much less attention to the equally important aspects of business negotiations, regulations, economics, accounting, financial auditing of oil companies' accounts, and financial and strategic planning. Despite the quality of consultants and financial auditors contracted under the project to address these aspects, there is still limited capacity in the government to plan, supervise, and challenge the findings and recommendations of outside consultants. The project thus failed to establish an adequate institutional capacity in many of these areas. Efficiency: Substantial 21. At appraisal (1992), production at Alba was estimated to increase from 2,500-3,000 barrels per day (bpd) to 5,000-6,000 bpd by 1993, and production of gas was to increase from 35 million cubic feet per day (mmcfd) to 80 mnmcfd. By completion (end of 1997), these targets were fully met (6,700 bpd of condensates and 80 mmcfd of gas), and, subsequently, were considerably exceeded: by the end of 2001, production of condensates at Alba reached 10,000 bpd and they are soon to increase to 30,000 bpd (five times the original estimate), and gas production increased to over 195 mmcfd (more than twice original estimates). Gas reserves are now estimated at 8 tcf, more than 15 times reserves at appraisal. In line with the recommendations of the gas utilization and environmental impact studies financed under the project, practically all gas is processed dovwnstream into LPG (2,300 bpd, soon to increase to 10,000 bpd), methanol (19,000 bpd), and power (1OMW), or re-injected, almost eliminating gas flaring and associated pollution. 22. It is not possible to quantify the extent to which the project contributed to collection of oil revenues (through expertise provided to evaluate and approve production plans and monitor the oil companies). At appraisal, the government share of oil revenues from Alba was projected to increase from about US$3 million per year to US$ 10.5 million by 1995 and to about USS19.0 million by 1996/97. Actual government oil revenues from Alba are likely to be substantially above these levels, as a result of production increases, downstream developments, increases in international oil prices since appraisal, and revised contractual terms. Revenues from the Zafiro field, on which much of the project technical assistance focussed, are considerably above those of Alba. No data on the breakdown of oil revenues is available, but overall they increased very substantially (to about US$200 million in year 2000). 23. Although returns are likely to be considerably above appraisal estimates, efficiency is rated only substantial, due to uncertainty regarding their level and the lack of transparency (it is not clear that all revenues due were actually collected). 5. Salaries offered by oil companies are regulated by law and are a multiple of those in the government. The establishment of a public company (GE-Petrol) able to offer competitive saiaries is viewed by some government officials as a way to retain qualified staff without having to address the issue of civil service salaries.  7 Box 1. Environmental Aspects Alba Gas and Condensate Field The Alba gas and condensate field was developed in 1991 by an independent operator, Walter Intemational, at very low investment cost. At appraisal, the field was flaring about 35 mmcfd of gas, for a production of 3,000 bpd of gas condensate. In addition, safety and environmental control in offshore and inland facilities were very hlmited. Addressing these issues was considered an important objective in project design. Uses of associated gas - Studies to identify the most cost-effective method to use Alba's associated gas were carned out during project preparation and early during project implementation, and their recommendations were implemented In early 2002, the power plant was being operated by Marathon (with further plans to expand), the LPG plant was in operation and its capacity was expected to increase from 2,300 bpd to 10,000 bpd before 2004, a 19,000 bpd methanol plant had been operated since mid-2001, and most remaining gas was being re-injected, minimizing gas flaring. The downstream methanol plant was built according to international environmental and safety standards and Environment Monitoring, Emergency and Safety Plans were developed with the assistance of specialized international companies. Also, the plant has an on-site environmental division and is implementing an Environmental Management System. Recently, Marathon, the main owner and operator of the new methanol plant, acquired all CMS Energy interests in Equatorial Guinea, including Alba. This acquisition should further contribute to optimize Alba production and integrated use and commercialization of associated gas. Environmental and Safety Risks - A 1994 environmental impact study identified a number of safety and environmental risks due to deficiencies in production facilities and made recommendations for improvements. Government pressure to implement the recommendations of this impact study as well as of the gas utilization study also carried out under the project accelerated the change of operator in May 1995. The new operator gradually implemented the recommended measures such as improved lighting of the production tower, installation of lightning protection and fire prevention systems, and construction of new tanks (old storage tanks with leaks are now stopped). Oil Production Fields The Zafiro complex is equipped for the use of up to 90 mmcfd of associated gas for re-injection and gas lift, reducing the amount of gas flared. However, the need to limit gas flaring will be a bottleneck to future production increase. The Ceiba field, offshore from Rio Muni, does not have a problem of excess associated gas. In fact, the expansion plan to 160,000 bpd includes facilities to inject water to maintain field pressure. Petroleum Products Import, Storage, and Distribution Facilities The issue of the poor environmental and safety conditions of the storage and distribution facilities was recognized during appraisal but not directly addressed by the project. As expected at appraisal, the revamping of the petroleum products storage and distnbution facilities was financed (USS3 million) by the French Caisse Centrale de Cooperation and implemented under the control of the technical department of Total (at that time these facilities were govemment owned and operated by Total). Since 1998, after liberalization of petroleum product distribution, the government sold the facilities to Total, which built new tanks and fire protection systems in Bata and Malabo. Environmental Framework The Alba environmental impact assessment also recommended that an environmental and safety law for the mining and oil sectors be enacted. Instead, an environmental section was established within the Ministry of Mines and Energy (MME) in 1995, and environmental provisions have been included in PSCs, but these arrangements remain insufficient. The environmental provisions in the contracts are general obligations to protect the environment, but the MME recognizes that new contracts should have environmental obligations spelled out, including mitigation measures. Finally, the Ministry of Forest and Environment has already prepared a draft national environmental law, including petroleum environmental regulations that were submitted by the MME. The national environmental law is expected to be enacted in 2002 after having been discussed with the sector ministries. The objectives of transparency and institutional development (i.e. capacity building and sector institutional strengthening) were only partially achieved. There have been positive developments since, which can be credited to the project, at least in part. Technical assistance provided under the project laid the basis for the govemment successful renegotiation of the PSC for Zafiro-Topacio in March 1998, and subsequently of other contracts, including the one for Alba, and to the amendment of the Hydrocarbon Law and model PSC in November 1998. In fact, the govemment has chosen to retain one of the technical assistance firms financed under the project as official technical adviser to the MME, to provide ongoing assistance in exploration and production matters. In line with the recommendation of the study carried out under the project, the framework for petroleum product import, storage, and distribution was liberalized after project completion and the facilities were privatized. Draft environmental regulations prepared on the basis of the regulations prepared by the project consultants have been submitted by MME to the Ministry of Environment.  8 Institutional Development Impact: Modest 24. The sector institutional capacity has improved but remains weak. Improvements came from staff training and technical assistance, which built up MME's capacity and efficiency. Some limited improvements in the energy sector organizational structure took place, including shifting the responsibility for the power sector from the Ministry of Industry to the Ministry of Mines and Hydrocarbons, which then became the MME. An environmental section was established within MME. Petroleum product import and distribution were liberalized and facilities privatized. Finally, the regulatory and contractual frameworks for exploration and production have improved. 25. However, the rapid increase in petroleum activities, the creation of GE-Petrol, promotions with transfers of trained personnel to other agencies, and salary differentials with the private sector, have again strained the available capacity. The regulatory and contractual framework is still very favorable to oil companies. Environmental and other detailed regulations have still not been enacted. Finally, lack of transparency with respect to the collection, management, and disposition of oil revenues continues to be a senrous issue (although some progress has been reported recently). Sustainability: Likely 26. Overall sustainability is rated as likely despite some serious uncertainties regarding the government's commitment or ability to address long-term institutional, environmental, economic, and social issues. 27. Technical and financial resilience of project benefits is high. The project helped to ensure the adoption of sound long-term development plans in the development of the oil sector. Benefits from current oil activities are expected to be sustained at least for the next 15 years, and further findings are likely. Equatorial Guinea is now a major FDI destination in Africa. 28. Environmental sustainability of operations at Alba is likely. The operator has implemented the recommendations of the environmental impact study and the study on downstream use of gas. Gas flaring at Alba is now minimal. The downstream methanol plant was constructed and is operated using intemational standards. In other areas, contractors also endeavor to minimize gas flaring through reinjection and to deal with other environmental concerns (including safe disposal of waste, muds, and chemicals), and all contractors have environmental teams working in the country. With respect to import, storage, and distribution of petroleum products, the issue of poor environmental and safety conditions in the govemment- owned facilities identified at appraisal was resolved with financing from Caisse Centrale de Cooperation Economique in 1993. Since then, the facilities were sold to the concessionaire, which has built new tanks and fire protection systems. General environmental protection obligations are included in PSCs. Nevertheless, the lack of environmental regulations and of institutional capacity to monitor environmental performance and impacts is an area of concern. 29. Sustainability of institutional achievements will continue to depend on outside technical assistance, until sufficient local capacity is developed. The ability to establish and maintain local capacity within the Government, however, may be seriously eroded if the Government continues to lose qualified personnel by paying them salaries much below those offered by oil companies.  9 30. Given the dominance of the oil sector in the economy, the resilience of economic benefits to the country, i.e., maintaining the level of overall economic development in the long termn after the depletion of reserves, will depend on the ability of the government to manage the oil boom well and to create the conditions for the pnvate sector to develop other sectors of the economy. While direct employment creation in the oil sector is limited, indirect employment may be higher. On the other hand, there is a danger that the oil boom will further depress the traditional sectors. Avoiding adverse effects will depend on a firm govemment commitment to a development strategy that ensures sustainable development after oil depletion (avoiding the so-called "Dutch disease"effect). It will also require considerable institutional strengthening throughout the government, much improved governance and transparency, and a clear development strategy . There have been positive signs since 2002 that the government is committed to these goals. The recent government request for FIAS assistance for investment promotion in the non-oil sectors is an indicator of this positive change, as is renewed government interest in IMF and Bank assistance after several years of absence. 31. Resilience of economic benefits will also depend on social and political stability, which in turn are subject to how the govemment ensures that the benefits of oil discovery and exploitation benefit the mass of the population. If oil revenues are perceived to benefit only an elite, and regional and income disparities are exacerbated, political and social turmoil may jeopardize economic development. The country's social indicators in 1990-96, during project implementation, were among the worst in Africa. There are no consistent, updated data showing these indicators today, but they are unlikely to have changed significantly, as the major revenues from the oil boom started flowing only after 1998. There have been some visible investments in infrastructure (roads, ports), but investments in social services so far appear to have been very limited. There are large capacity constraints in all sectors, for planning, project preparation, procurement, implementation, and control. Bank Performance: Unsatisfactory 32. In general, project design was sufficiently broad and flexible to adapt to changed priorities during implementation, except that objectives and components were not consistent in their presentation the MOP, the Technical Annex, and the Credit Agreement, leading to confusion about their relative importance and interpretation. In particular, Bank staff perceived that renegotiation of the existing contract was important in achieving the project objective of maximizing revenues from the Alba field. Yet, renegotiation is mentioned only in the MOP and not in the Credit Agreement or in the Technical Annex to the MOP. Also, project design should have from the start more clearly and comprehensively identified the need for capacity building to monitor and control all aspects of the performance of oil companies, including skills required for projecting accrued oil revenues, monitoring their effective collection, monitoring and auditing companies financial accounts and reports, and to review eligibility of recovered operating costs and investments. This should have required more attention to the establishment of appropriate structures, systems, and procedures as well as the design of a training program based on a comprehensive needs assessment. 33. Throughout design and implementation, up to project completion, there was a fundamental difference of perception between the Bank and the Government with respect to the need and timing for renegotiation of signed contracts. Both the Alba and Zafiro contracts, which were signed, respectively, in April 1990 and June 1992, were in line with the 1981 Hydrocarbon Law and PSC model prepared under an earlier Bank/UNDP technical assistance operation. Both contracts were negotiated and signed without Bank assistance (the Zafiro contract was signed shortly before the project's Board approval, without Bank knowledge). During appraisal, however, Bank missions assessed that contract terms were excessively favorable to operators,  10 especially with respect to income tax provisions, and, dunng supervision, came to view renegotiation of both contracts as critical and an implicit objective of the project. Bank supervision missions interpreted govemment reluctance to renegotiate as lack of commitment to the fundamental objectives of the project, and as preference for immediate cash over long-term financial optimization (giving priority to negotiating advances on future oil revenues). The govemment thought that renegotiation of the contracts so soon after their signing would undermnine investor confidence in the country, unless other advantages could be offered to the contractors in retum, such as expansion of granted areas. Until Zafiro was discovered in 1995, oil companies were not exactly rushing to explore and develop available blocks, so in retrospect the government position was valid. Yet, the Bank missions seem to have ignored the dilemma this posed to the Govemment. Failure to engage in a more constructive and balanced dialogue on this question undermined trust between the govemment and the Bank, and reinforced the government's tendency toward secrecy. 34. Project supervision was usually limited to an annual mission by one person. Although missions identified the most important issues and reported on them, they would have benefited from including lawyers and financial experts familiar with financial planning and auditing aspects of the oil industry, as well as project financial management specialists. Lirmited supervision resources also explain why some issues were not followed up, including the bad environmental performance in the import, storage, and distribution of petroleum product facilities, and, more important, the verification of compliance by the govemment of the oil budget transparency covenant. Finally, the Bank did not strongly react to overdue project audits, inadequate project accounting, and failure to meet the covenant of explicitly accounting all oil revenues through the budget. 35. Although discussions for a follow up operation were initiated during supervision and the need for such an operation was recorded in the ICR, the Bank decided not to proceed. Although there were clear reasons (unsatisfactory Bank portfolio overall, arrears on debt service payments, lack of transparency), this was unfortunate. As a result, the Bank was absent in the cntical years that followed major oil discoveries, and the govemment was left on its own to deal with outstanding legal and contractual issues, when the level and range of skills required to monitor all phases of activities and accounts of a much larger number of oil companies became substantially more complex and demanding.6 36. Overall, Bank performance is rated as unsatisfactory. Borrower Performance: Unsatisfactory 37. During implementation, the Govemment was able to effectively use project assistance to promote and develop the country's oil potential, and to improve the development of the Alba field and resolve environmental and gas utilization issues arising from its operations. After completion, the Govemment took a number of pending institutional strengthening measures, which were part of the project objectives and for which technical support had been provided under the project. These included amending the Hydrocarbon Law and the PSCs, liberalizing and privatizing petroleum product imports and distribution, and initiating a regular auditing program of oil companies accounts. 38. However, during implementation, Government performance was deficient on a number of accounts: first, the above-mentioned institutional measures were taken with considerable delays. 6. The former and current Ministers of Mines and Energy and the Minister of Planning have stated to the assessment mission their regrets that the Bank abandoned the government at the time it was most critically needed  I1 Second, pressing cash needs led the govemment to negotiate off-the-budget cash advances against future oil revenues with operators of both Alba and Zafiro, contributing to lack of transparency. Third, project management, accounting, and auditing were very deficient. Fourth, the government's unwillingness to share critical contractual information and overall tendency toward secrecy hindered the effectiveness of the Bank and of one of its main consultant. Fifth, most importantly, the government defaulted and is still in default on its obligation under the project to account for all oil revenues through the budget. 39. Despite the upgrading of the outcome rating to Moderately satisfactory and Govemment achievements in recent years, Borrower performance is still rated Unsatisfactory (though marginally so), principally on account of poor project management and lack of transparency. LESSONS * As soon as significant discoveries are made, important issues arise associated with the impact and distribution of oil wealth, which need to be addressed rapidly through the Bank-country dialogue to ensure long-term sustainability. These include the fundamental issues of national and sectoral environmental regulations and their enforcement capacity, budget transparency and allocation, strategies for public expenditures, pace of new licensing and development, savings mechanisms, and distribution of oil proceeds between the various levels of government. In the case of Equatorial Guinea, the Bank raised these issues in 1998, but only after the project was completed, and at a time of tense relations. * If the country is facing strong macro-economic constraints in the early stages of oil development, the Bank might consider supporting the adoption of policies and strategies leading to the proper management of oil wealth through adjustment or sector loans. * In countries with low levels of institutional development and capacity, continuity of IDA or Bank support in sectors critical to the country's development is very important, in particular when sector development has already started to accelerate. * When institutional strengthening is essential to project success, a review of the civil service salary structure during preparation is necessary to identify major issues that may affect the sustainability of institutional strengthening efforts, and to establish alternative institutional arrangements if needed. * If the government must give especially favorable terms to attract the first investors to explore new territory for oil and gas, negotiated contracts need to incorporate time and geographical limits on those terms. * Whenever the implementing agency does not have the capability to manage the project (including accounting and reporting), efficient implementation requires that appropriate provisions to contract outside expertise for that purpose be incorporated in project design * Consistency on objectives and their ranking between Bank documents and unequivocal understanding and commitment of the borrower to those objectives are prerequisites for sound project execution.   13 Annex A. Basic Data Sheet SECOND PETROLEUM TECHNICAL ASSISTANCE PROJECT (CR. 2408-EG) Key Project Data (amounts in USS million) Appraisal estimate Actual or current Actual as percent of estimate appraisal estimate Total project costs 2.70 2.92 108.1 Credit amount 2.43 (SDR 1.8 million) 2.47 101.6 Cofinancing 0 0 Cancellation (SDR) 0 0 Date physical components completed December 31, 1996 June 30,1997 Economic rate of retum Not Applicable Not Applicable Project Dates Original Actual Identification February 1991 Preparation February 1991to March 1992 Appraisal March 1992 Negotiations May 1992 Board Presentation June 1992 July 2, 1992 Signing July 10, 1992 July 22, 1992 Effectiveness September 1992 November 20, 1997 Project Completion December 31, 1996 June 30, 1997 Project Closing June 30, 1997 June 30, 1997 Staff Inputs (staff weeks) Total Up to Appraisal 14.9 Appraisal to Board 2.0 Supervision 69.6  14 Mission Data Stage of Project Cycle No. of Persons and Specialty Performance Rating Month/Year Number Specialty Implementation Development Progress Objective IdentificationlPreparation: 2/92 2 PS, FA Appraisal/Negotiations: 3/92 2 PS, FA Supervision 8/92 1 PS No rating No rating 1/93 1 PS 2 2 2/94 1 PS 2 2 10/94 1 PS S S 2/95 2 PE, PS S S 12/95 (in Washington) 3 PE, ES, EE U S 5/96 2 PE, ES S S ICR 12/97 3 (2 cons.) PE (Task Manager) U U FA= Financial Analyst PS= Petroleum Specialist ES= Energy Specialist PE= Power Engineer EE= Energy Economist  15 Annex B Annex B. Historical Development of Gas and Oil Exploration and Production 15' Petroleum TA 2Id Petroleum TA Project Project Field Completion Appraisal Completion End 1997' March 2002 (December 1989) (March 1992) (June 1997) Alba - offshore northwest Bioko Gas and condensate Operated by Walter In May 1995, Walter Operated by CMS-NOMECO Operated by Marathon, which bought field discovered by International (PSC International sold all CMS rights in EG for about GEPSA (joint signed on April 1990 its rights to CMS Oil US$lbillion. venture Hispanoil- and production and Gas /NOMECO, Government) in started on December which became Alba's 1983. 1991). operator. Occupied by other major oil developments, Hispanoil (now REPSOL) reduced exploration activities in EG, leading to the relinquishment of exploration and production rights in March 1990. Reserves: Reserves: Reserves: Proven reserves: Estimated. Reported at 4.5 TCF. But drilling since Nat. Gas: 535 bcf Gas 1,500 bcf ~~~~1999 increased estimated reserves to Condensates: Condensates 120 mmb close to 8 TCF, with possibility to 28mmbo Poe obe 28mmbo Proven In 2001, CMS discovered gas Gas 537 bcf condensate 6 km north of the Alba Condensates: 53 mmb field, emphasizing the large potential Of which extracted: of the Alba block. Gas 180 bcf Condensates: 13 mmb 7. From "The Challenge of Sudden Wealth" - World Bank Report dated February 26, 1999.  16 Annex B 1"' Petroleum TA 2Id Petroleum TA Project Project Field Completlon Appraisal Completion End 19977 March 2002 (December 1989) (March 1992) (June 1997) Production: Production: Production: Production: Gas condensates . Gas condensates: . Gas condensates: 6,700 bpd . Gas: production increased to over .2,500 to 3,000 bpd 6,000 bpd . LPG: a 2,000 bpd plant was 195mmcfd of gas. .Expected peak . LPG: 2,000 bpd started at the end of 1997. . Gas condensates: 14,000 bpd production: 5-6,000 Gas flared. Methanol: a 2,500 tpd plant . LPG: 2,300 bpd. bpd by 1993 80 mmcfpd was under construction and Gas flared: expected to start at the end of 2000. Further expansion could increase 35 mmfd oe ln-patbig liquids production to 30,000 bpd of expected to increase or tplant being condensates and 10,000 bpd of LPG. to 80 mmcfpd Gas flared' 80 mmcfpd. Use of Gas: Power: 10 MW (using 3-3.5 mmcfd of gas) Gas reinjected 35 mmcfd Methanol: the 19,000 bpd plant built by AMPCO (a consortium of Marathon, Samedan and the Gov of EG) was completed and is operating satisfactorily since May 2001, using 125 mmcfd of gas. Gas flared is currently minimal at the gas processing plant but will increase when expansion is implemented. Zafiro -Topacio - Block B offshore By mid-1992, PSC Oil found in 1995. Operated by Exxon/Mobil and miriority Bioko signed with Mobil Mobil invested US$1 stake partner Ocean Energy and UMC for Block B billion in 18 months. (previously UMC). Reserves: Reserves: Estimated: 300 mmb. Proven: over 400 mmb of oil. Proven: 100 mmb. Of which extracted: 25 mmb. Production: Production: 80,000 bpd, 155,000 bpd and 70mmcfpd of  17 Annex B 1" Petroleum TA 2Id Petroleum TA Project Project Field Completion Appraisal Completion End 1997' March 2002 (December 1989) (March 1992) (June 1997) expected to increase associated gas are produced via the to 120,000 bpd by Zafiro FPU/FSO floating units (storage end 1999 capacity of 1.8 bbis) and a 60,000 bpd fixed production platform. Gas is separated from oil on board and oil transported via pipeline to the FSO. In addition to 2.1 mmcfpd of gas used for onboard power and steam generation, part of gas is used for reinjection and lift, reducing amount of gas flared. Installations have a total capability of utilizing 90 to 95 mmcfd for reinjection and gas lift. Ceiba - offshore Rio Muni - Block F In September 1997, Ceiba field discovered in October and G the Government 1999, and first production achieved in granted a license for November 2000. the 2 blocks to Operated by Amerada Hess Triton. 3 D seismic (previously TRITON) and minority completed and partner Energy Africa. exploration drilling was expected to begin in 2002. Reserves: 300 mmb of oil, expected to increase dramatically. Amerada has announced a new oil find (Ebano in block F) similar to Okume and Oveng in block G discoveries announced in June 2001. In February 27, 2002, Amerada also reported another oil discovery (Akom) in block G, similar in quality to Ceiba, and to the above recent three discoveries (Ebano, Okume, and Oveng). Production: In May 2001, production was 48,000 bpd and 24mmscfd of gas using a  18 Annex II 1" Petroleum TA 2nd Petroleum TA Project Field Completion Appralsal Completion End 1997' March 2002 (December 1989) (March 1992) (June 1997) 60,000 bpd production capacity and 2 million bbls storage capacity FPSO vessels Expansion to 160,000 bpd is expected to be completed during 2002 and includes facilities to inject 135,000 bpd of water to maintain field pressure and optimize oil recovery. Ceiba field output is being doubled to 100,000 bpd, leaving 60,000 bpd of the vessel capacity for other fields Rio Muni Hamilton Oil acquired a malority equity in the exploration/productio n rights detained by Clarion Bioko Block C License granted to MOBIL, UMC, and YUKONG in 1994 - no discovery yet. 1 exploration well to be drilled. Bioko Block A License granted to UMC in Was relinquished 1992 - no discovery yet. 1 exploration well to be drilled. Bioko Block D License granted to UMC- Currently held by Marathon, Ocean YUCONG in 1995- discovery Energy, and SK corporation. in 1997. 3 exploration wells to be drilled. Bioko Block E Awarded in 1999 to Elf in partnership with Petrobras. 3 D seismic completed and exploration drilling to begin in 2002. Rio Muni Block H, I, J, K, and L Licenses awarded separately to Atlas, Vanco, and Chevron in 1999. 3 D seismic completed and exploration drilling to begin in 2002  19 Annex C Annex C. Table of Objectives and Components This table was prepared using to the Loan Agreement; the objectives are stated somewhat differently in the appraisal report and Memorandum of the President. Objectives Components Related Activities Targets Achieved Output Outcome Main Obiectives a- Ensure that the Borrower receives the maximum and sustainable revenue from the Efficacy Rating: Substantial production of the Alba field. Field development and downstream use of gas optimized and sustainable - most gas Is used in downstream processing (into LPG, methanol and power generation) and re- injection. Furthermore, recent acquisition of CMS interests In EG by Marathon, which also controls and operates the new methanol plant, should further contribute to --- optimize Alba field development and the integrated use and commercialization of the gas. Environment concems were dealt with - gas flaring was practically eliminated, safety and environmental risks were minimized through implementation of the environment impact assessment recommendations; and the new methanol plant was built and is operated according to international standards. Revenues from Alba field were improved, but still not optimized - the PSC contract was renegotiated after an amendment to the hydrocarbon law was enacted in November 1998, audits of Alba and other operators accounts are now done on a regular basis and downstream developments should bring further tax returns to the government. However, contracts are still too favorable to producers and producers' audits are still delayed. a-1 - Maximum revenues Part B (1)- Technical - Recruitment of a - QUAD consulting firm - In addition to monitoring Achieved- Monitoring contributed from Alba field assistance for monitoring the production engineer and a recruited in 1993 to monitor Alba's production as well to improvements in operations production of Alba field reservoir specialist. Alba production activities. as exploration in the and, together with government block, the consultant pressure to implement the carried out a recommendations of the gas development study and utilization study and of the made recommendations Environmental Impact regarding the condensate Assessment, accelerated the plant, production, and change of operator. The new reservoir and gas operator (CMS Energy) operated utilization. the field in an optimal manner. At - Training of MME staff completion, production of gas condensates had reached 6,000 bpd, as expected at appraisal for peak production in 1993. By the end of 2001, production of gas  20 Annex C Objectives Components Related Activities Targets Achieved Output Outcome condensates reached 14,000 bpd and further expansion is expected to 30,000 bpd. Early in 2002, Marathon, which operates the new methanol plant, acquired all CMS interests in EG. This acquisition should further contribute to optimize Alba production and the integrated use and commercialization gas. Part B (2) - Technical Recruitment of a BEICIP, a consulting firm - Monitoring of Achieved- Proper monitoring of assistance for monitoring the geophysicist and a well site was contracted in October exploration in the Alba field together with government exploration activities carried geologist 1993 for monitoring of field (operated by Walter pressure for the implementation of out in the country. exploration in the Alba and International and, after the gas utilization study and B blocks. However, these May 1995, environmental impact assessment services were interrupted at CMS/NOMECO) and of recommendations contributed to the end of 1994, due to Mobil in Block B accelerate the change in operator suspension of - Assistance in analyzing of Alba field. The new operator disbursements by the Bank, the development plans dramatically increased estimated and MME decided to entrust proposed by the reserves through intensive QUAD with the task of oprtr.exploration: Alba proven reserves assisting in supervising all oprtr.were about 535 bcf and 28 mmb exploration activities in the - Training of MME staff of condensates at appraisal. By country. the end of 2001, reserves were reported at 4.5 tcf of gas and operator's drilling effort since 1999 increased estimated reserves close to 8 tcf. Part B (3)- Technical Financial auditing of A consulting contract was At the end of 1997, only Partially achieved - It is only by assistance for reviewing audit operator's accounts. signed with BEICIP to audit the accounts for the end of 2001, that the reports on Contractors Alba's financial operation, recoverable exploration Government completed the audit expenditures. and assist MME in and production costs of of companies operating in the oil calculating and negotiating Walter International for sector for the period 1997-1999 income tax payable by the period 1991-94 had The audit identified some major Albas's operator after tax been audited revenue shortfalls that are being holiday ends In 1996. discussed with oil companies. The government is currently completing the review of the 2000 audit. Part B (4)- Technical Valuation of Alba's This valuation was to be part Was not possible due to Not achieved assistance for evaluating the investments for the of the audit contract of inadequate accounting Contractor's development calculation of depreciation BEICIP. data provided by Alba's assets. and taxable income operator.  21 Annex C Objectives Components Related Activities Targets Achieved Output Outcome Part B (5) Technical Not achieved - commented under assistance in negotiating objective (d) renewal of existing contracts with the oil Industry a-2 - Sustainable revenues Part A (1) Study to design the The purpose of the study Under its above-mentioned The study analyzed the Achieved- the operator appears to from Alba most efficient way to develop was to independently contract, early in 1995, reservoir life and total be developing the field in an the Alba field determine the optimal QUAD completed an recovered volume under optimal manner. At the end of depletion strategy for the evaluation of the field and of different depletion 2001, most unused associated reservoir and have the Alba's production scenarios and gas was being re-injected to operator implement that operations. recommended a maintain pressure. Further strategy. feasibility study of gas re- improvement is expected since injection. the recent field acquisition by Marathon. b- Identify the most cost effective methods to utilize the associated gas from Alba Efficacy Rating: High - All study recommendations were implemented. The LPG, field. methanol and power plants are in operation and all remaining associated gas is re- injected to maintain pressure. Part A (2) Identify the most Feasibility study of Alba gas A preliminary study was The QUAD study At completion, most cost effective method to utilization completed in 1992 under recommended an LPG recommendations about the use utilize the Alba gas and assist Cr.1489. The question was plant, a methanol plant of flared gas were being the Govemment In carrying also dealt with by QUAD, and a power plant. It also implemented: a 2000 bpd of LPG out the adopted under the study of Alba recommended a started operations at the end of recommendations operations. feasibility study o gas 1997, a 10 MW gas power plant reinjection to maintain was under construction and a pressure. 2,500 tpd methanol plant had been contracted. Expansion plans also contemplated gas re- injection. In early 2002, the power plant was being operated by Marathon (with further plans to expand), the LPG plant was in operation and its capacity was expected to increase to 10,000 bpd before 2004, and a 19,000 bpd methanol plant had been in operation since mid-2001. In addition, most remaining gas (about 35 mmcfd) was being re- injected and gas flaring was minimal. A study on the rehabilitation The report confirmed the A new Bank operation for the and expansion of the recommendation of the power sector proved to be electrical system (not gas utilization study impossible mainly on account of  22 Annex C Objectives Components Related Activities Targets Achieved Output Outcome originally included) was regarding the economic overall poor Bank-EG relations. carried out under the use of gas for electricity However, as already commented, project. This report was production and identified a 10 MW power plant has been intended to serve as the rehabilitation works built, with plans for further basis for the preparation of a needed in Malabo and expansion, since it is already new project in the electrical Bata networks. insufficient to meet demand. I ~~~~~~~~sector.II c- Minimize risks for the marine and land environment during the production of the Efficacy Rating: Substantial - The Alba operator gradually implemented the field recommendations of the environmental impact study. The methanol plant was built and is operated according to international environmental and safety standards. Zafrro field is equipped for reinjection and gas lift to reduce the amount of gas flared. However, arrangements such as the environmental section created in MME and the environmental provisions included in the PSC contracts will remain insufficient until a national environmental law is enacted and the environmental entity is substantially strengthened. Part A (3) Study of the Consulting services to An environimlental Imiipact The study identified a The operator has been gradually environmental impact of study the environmental assessment wvas carned out in number of safety and implementing the recommended production of the Alba field impact 1994 environmental risks due measures: improvement of and the processing of its to deficiencies in the lighting of the production tower, effluent. production facilities and installation of lightning protection made a series of and fire prevention systems, and recommendations for construction of new tanks (old improvements. storage tanks with leaks are now - three MME engineers stopped). Also, downstream were trained by the power, LPG, and methanol consultant facilities were built and most dry gas is used or re-injected, as - the study also already commented. recommended that an Marathon states that the methanol environmental and safety patwsbitacrigt P law for the mining and oil and WB guideltnes and sector be encted. Environment Monitoring, Emergency and Safety Plans were developed with the assistance of specialized international companies. Also, the plant has an on-site environmental division and is implementing an Environmental Management System. d- Improve the efficiency of energy sector institutions Efficacy Ratina: Modest - the sector reorganization and the data filing system components were partially implemented. The hydrocarbon law was amended after I project completion, somewhat improving the government position and its ability to  23 Annex C Objectives Components Related Activities Targets Achieved Output Outcome supervise oil companies, but environmental and detailed sector regulations have still not been enacted, and the contractual framework remains overly generous to operators. Part A (5) Study for improving - Consulting services to - An energy sector - The study Partially achieved-one of the the institutional organization carry out the organization reorganization study was recommendations were study's recommendatons aiming of the energy sector, and study; carried out under the project of a general nature and at the development of a coherent Part B (6) Technical in 1994. did not propose an energy policy was adopted: Assistance for applying the adequate organizational transfer of electricity from Ministry recommendations of the structure and systems of Industry to Ministry of Mines study. needed to efficiently and Hydrocarbons (MMH, which manage the sector. subsequently became MME). Part B (10) Technical - Establishment of a sector - The consultant helped - A complete data - Partially achieved - At assistance to establish a data data filing and statistical MME organize the available organization and storage completion, MME was considering file and statistical system data recording system. technical data routinely system was not the construction of an information within the MMH. supplied by operators and implemented. The bulk of center in Malabo. However, as of provided training in its use sector technical and March 2002, the bulk of the and maintenance. financial existing data is technical and financial data was kept under safekeeping still being kept by Exploration in London and Geneva. Consultant Ltd. (ECL) in England. Part A (4) revision of the Consulting services in legal This assistance was part of - A proposed amendment Partially achieved - In November petroleum exploration and areas to review the the BEICIP's contract. to the hydrocarbons law, 1998, an amendment to the production framework, and petroleum legislation and its regulations, and a hydrocarbon law was enacted. assist Government in revised PSC model were The revised framework led to negotiating contracts. prepared. At project improvements in the government completion, the position and simplification in documents had still not contract supervision, although not been finalized and the to the extent adopted by Government was seeking neighbors. Revisions include the further advice from following improvements: (i) consultants and royalties increased from 10% to operators before enacting 12-16% depending on daily the new hydrocarbons production rate; (ii) recoverable legal framework. exploration and production costs are now limited to 80% of revenues less royalties; (iii) Gov. oil share which was previously related to ROR (30% to 80% depending on ROR as long as ROR is in excess of 30%), is now easier to monitor, being set at 0% to 50% based on cumulative production; and (iv) an equity share of 5%. However, the revised framework is still  24 Annex C Objectives Components Refated Activities Targets Achieved Output Outcome considered generous compared to neighbors, mainly due the permanence of income tax of only 25% Sector regulations are still considered ambiguous, leading to confusion and compliance issues. and environmental regulations have yet to be issued An environmental section was established within MME in 1995 and environimilenital provisions are included in PSC contracts, but these arrangements remain insufficient. However, the Ministry of Forest and Environment has prepared a draft national environmental law, including petroleum environmental regulations, which is expected to be enacted in 2002 after discussion with the sector ministries. - Under the project, in Partially achieved - By Part B (5) Technical ~~~~~~~~~~~~~~~preparation for re- completion, the Government had Passitanc in Tcneicatin nwnegotiations with preferred to independently re- conitrancts or rnewotalin of wNOMECO, BEICIP negotiate the contracts for Alba Eis contracts,o newi oil prepared written and Zafiro to obtain financial existing contracts with oil ~~~~~~~~recommendations and advances on future revenues, but industry prepared cash flow the outcome remained at best simulations, financially neutral due to interest charges However, subsequently, in March 1998, the Government successfully re-negotiated the PSC for the much bigger Zafiro oil reservoir. Later in November 1998, after the amendment to the hydrocarbons law was enacted, the PSC of Alba was also adjusted. e- Strengthen the capacity of the MMH in monitoring the activities of oil companies e (1) - Efficacy Rating: Modest- Staff training improved MME capacity and efficiency in (el), and in evaluating the supply and pricing system for petroleum products (e2). monitoring the oil exploration and production companies' activities, but, the rapid increase in petroleum activities since, has again strained available capacity. However, more emphasis should have been given to management and financial control  25 Annex C Objectives Components Related Activities Targets Achieved Output TOutcome techniques and project management. e (2) - Efficacy Rating: Modest- Petroleum products import and distribution are now liberalized and Government facilities were sold to Total. Mobil has entered distribution, but has chosen not to import for the moment, due the size of the market and existing storage capacity, until market develops further. Thus, Total remains with a de-facto import monopoly. The price structure and level and fiscal regime for petroleum products have remained practically the same since appraisal. Domestic prices to private consumers are currently subsidized by the Government out of the budget. e (1)- Greater capacity to Part C - Implementation of a - training by expatriates in Most of the training of Except for some training Partially achieved -Increased monitor oil companies. training program presented Malabo; MME's staff was carried out in business accounting knowledge of MME's staff and by the Govemment before - cooperation with the within the scope of two and auditing, training was improved MME's capacity and Board presentation operations of oil companies major consultant contracts. mainly on technical efficiency in monitoring oil in the country; Training included seminars aspects of seismic companies' exploration and in EG, courses at processing and production activities. However, the - the project would finance consultants' headquarters, interpretation, geology rapid increase in petroleum scholarships, tuition fees and on the Job training. and geophysics, drilling activities and the resulting need and travel expenses. and production; and for more supervision again English. Also some created urgent and critical training training was given in needs. Also, the training program environmental and safety should have given substantially aspects. more emphasis to management and financial supervision and accounting and auditing techniques such as investment, exploration and production costs control, project management, and international and national bidding and procurement of concession contracts. A substantial number of staff trained under the project has left MME. Some of them are now working with petroleum companies with much higher salaries, and many were promoted to higher positions in other Government agencies. Recently, staff from MME was transferred to the recently created national petroleum company- GEPETROL, including MME's environmental division chief, who was appointed president of GEPETROL. Finally, One of the_G  26 Annex C Objectives Components Related Activities Targets Achieved Output Outcome two main consulting companies was retained to provide assistance and training on an on- going basis. Part D - Office and Field - rehabilitation of the MMH The project financed the Achieved. Equipment building; and rehabilitation of MME - cars for MMH to carry out building and the acquisition the monitoring of the of two field cars. petroleum downstream sub sector. e- (2) Greater capacity to Part B (10)- TA for the control Consultant to assist in Consultants' services were A study completed in Partially achieved -. At completion evaluate supply and pricing of the supply, conservation, reviewing the products' contracted. 1989 under the first TA the original situation remained systems for petroleum transport and distribution price structure and fiscal identified lack of unchanged as the Government products. activities of petroleum regime for petroleum transparency in product position was then weakened by products. import/export procurement and high substantial arrears with the CIF prices. Under the concessionaire However, project, the consultants subsequently in 1998, the prepared a draft Government sold the petroleum agreement with the product storage and distribution import and distribution facilities to the concessionaire. company, revising the Petroleum product import and terms of supply, but, by distribution are now liberalized. completion, the matter While Mobil is also developing a had not been taken any distribution network, it is selling further. products currently purchased from As expected at appraisal, Total Elf Fina (Total), which the revamping of the therefore currently remains with a petroleum products de-facto import monopoly, due to storage and distribution the size of the market and facilities, which were in ownership of the storage facilities. poor environmental and The domestic price structure of safety conditions, was petroleum products has remained financed by the French practically the same since 1992, Caisse Centrate de when the project was appraised. Cooperation and The few changes include: (i) implemented under the cancellation of sale, municipal and control of the technical import taxes on jet fuel; and (ii) department of Total (at increased storage and equipment that time these facilities fees and distribution expenses to were government owned take into account inflation and the and operated by Total). cost of revamping facilities and of Since, after privatization, the new storage and safety Total has built new tanks investments  27 Annex C Objectives Components Related Activities Targets Achieved Output Outcome and fire protection The Reference Price (CIF landed systems in Bata and price, used as basis for deriving Malabo. controlled domestic prices) has not been adjusted since 1994, when it was based on US$15- 17/blo. Since the international price of oil is now higher, the government periodically reimburses Total the difference between the actual price and the reference price, in order not to increase domestic prices, which are controlled and are the same all over the country. The selling price to oil companies is freely negotiated. lb(iii)- setting a fiscal regime The fiscal regime on petroleum for petroleum product imports products has essentially remained and exports. the same since 1992.