China - Sichuan Gas Development and Conservation Project

Document of The World Bank Report No: 27062-CHA IMPLEMENTATION COMPLETION REPORT (CPL-37160 SCL-3716A SCPD-3716S TF-28693) ON AN IBRD LOAN IN THE AMOUNT OF US$225 MILLION AND A GEF GRANT IN THE AMOUNT OF SDR7.3 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR THE SICHUAN GAS DEVELOPMENT AND CONSERVATION PROJECT December 22, 2003 Energy and Mining Sector Unit Infrastructure Department East Asia and Pacific Region  CURRENCY EQUIVALENTS (Exchange Rate Effective as of June 30, 2003) Currency Unit = RMB (Yuan) RMB1.00 = US$ 0.12 US$ 1.00 = RMB8.26 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS CNOOC - China National Offshore Oil Company CNPC - China National Petroleum Company ERR - Economic Rate of Return FIRR - Financial Internal Rate of Return GTMD - Gas Transmission and Management Department IESM - Institute of Economic Systems and Management km - Kilometer MEIAO - Mechanical and Electrical Import and Export Administration Office MOF - Ministry of Finance PCL - PetroChina Ltd. PCL Southwest - PetroChina Southwest Oil & Gas Fields Company PPIAF - Public-Private Infrastructure Advisory Facility SAIETMEP - State Administration for Import and Export Trade of Mechanical and Electrical Products SCORES - State Council for Restructuring Economic System SINOPEC - China National Petrochemical Company SPA - Sichuan Petroleum Administration WTO - World Trade Organization Vice President: Jemal-ud-din Kassum Country Director Yukon Huang Sector Director: Christian Delvoie Sector Manager Junhui Wu Task Manager: Noureddine Berrah  CHINA SICHUAN GAS DEVELOPMENT AND CONSERVATION PROJECT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 5 5. Major Factors Affecting Implementation and Outcome 14 6. Sustainability 16 7. Bank and Borrower Performance 17 8. Lessons Learned 19 9. Partner Comments 20 10. Additional Information 21 Annex 1. Key Performance Indicators/Log Frame Matrix 22 Annex 2. Project Costs and Financing 24 Annex 3. Economic Costs and Benefits 26 Annex 4. Bank Inputs 28 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 31 Annex 6. Ratings of Bank and Borrower Performance 32 Annex 7. List of Supporting Documents 33 Annex 8. Legal Covenants 34 Annex 9. Resettlement 35 Map IBRD 32794  Project ID: P003609 Project Name: SICHUAN GAS DEV & CONSERVATION Global Supplemental ID: P003404 (Partially Blended) Supp. Name: SICHUAN GAS DEV. CON Team Leader: Noureddine Berrah TL Unit: EASEG ICR Type: Core ICR Report Date: December 22, 2003 1. Project Data Name: SICHUAN GAS DEV & CONSERVATION L/C/TF Number: CPL-37160; SCL-3716A; SCPD-3716S Country/Department: CHINA Region: East Asia and Pacific Region Sector/subsector: Oil and gas (100%) Theme: Pollution management and environmental health (P); Climate change (P); Other financial and private sector development (P); Regulation and competition policy (P) KEY DATES Original Revised/Actual PCD: 03/31/1991 Effective: 12/14/1994 12/14/1994 Appraisal: 05/30/1993 MTR: 11/16/1998 11/16/1998 Approval: 03/17/1994 Closing: 06/30/2001 06/30/2003 Supplemental Name: SICHUAN GAS DEV. CON L/C/TF Number: TF-28693 Sector/subsector: Oil and gas (95%); Central government administration (5%) Theme: Environmental policies and institutions (P); Pollution management and environmental health (P) KEY DATES Original Revised/Actual GEF Council: Effective: 09/16/1994 09/16/1994 Appraisal: 05/30/1993 MTR: 11/16/1998 11/16/1998 Approval: 03/17/1994 Closing: 06/30/2001 06/30/2003 Borrower/Implementing Agency: PRC/China National Petroleum Company; Sichuan Petroleum Administration; PetroChina Ltd. Other Partners: STAFF Current At Appraisal Vice President: Jemal-ud-din Kassum Gautam Kaji Country Director: Yukon Huang Shahid Javed Burki Sector Manager: Junhui Wu Richard S. Newfarmer Team Leader at ICR: Noureddine Berrah Selina Wai Sheung Shum ICR Primary Author: Salahuddin Khwaja 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Rating Rating (Supplemental GEF) Outcome: S S  Sustainability: HL HL Institutional Development Impact: SU SU Bank Performance: S S Borrower Performance: S S QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: Yes The supervision missions of March 1998 and November 1998 found implementation performance unsatisfactory due to delay in the implementation of downstream activities. The project was, therefore, considered at risk in 1998. Thereafter, the implementation has been rated as satisfactory. 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: Project Development Objectives (a) Support the restructuring of the Borrower's upstream oil and gas sector; (b) promote the development and conservation of gas resources in an economic, efficient and environmentally sound manner; and (c) strengthen the institutional capabilities of China National Petroleum Company (CNPC) and Sichuan Petroleum Administration (SPA). The formulation of project objectives was farsighted and appropriate. The project objectives were formulated at a time when China was still a net exporter of oil and the growth in domestic demand of oil and gas was outpacing the domestic production. (The net oil export had decreased from 25 million tons in 1987 to about 9 million tons in 1992.) Most of the major oil and gas producing fields were considered mature and many of these fields were experiencing production decline. Very large and sustained effort to increase exploration and development was essential to increase gas production. Critical constraints in the various aspects of technology, management and financing needed to be overcome. The sector organization was characterized by the dominance of government control and highly centralized planning. Since the 1960s, Sichuan Province had been a significant gas producing area but its gas production, then representing 42% of the national production, was declining. SPA, a subsidiary of CNPC, was by far the largest gas producer in Sichuan accounting for 98% of gas production in the province. With about 10% of the country's population and a per capita income of only 50% of the national average, Sichuan was one of the poorest provinces in China. While the economic growth in Sichuan was averaging around 10%, the growth of energy supply had not kept pace with the demand. As a result of severe gas shortages, industrial production was curtailed and industries were switching over from gas to coal. The share of natural gas in the commercial energy consumption had decreased from 19% in 1979 to 11% in 1990 while the share of coal increased from 68% to 74%. Rise in coal - 2 -  consumption was exacerbating the already serious environmental impacts linked with its use. Global Development Objectives. To assist the Recipient in its efforts to reduce methane emissions, enhance the operational efficiency and safety of gas transmission and distribution in Sichuan, and to strengthen the institutional capabilities of the operating agency. Almost all exploration, production, transmission and large scale distribution of natural gas in Sichuan Province was managed by SPA. Its gas transmission and distribution system, consisting of a grid of about 3,000 km of high-pressure pipelines was mostly 20 years old and was prone to breakdowns, accidents and gas leakages. Environmentally, the natural gas (predominantly methane) is a potent greenhouse gas. A pre-investment study of the system estimated that in 1992 around 20,000 tons of methane were released from the system into the atmosphere mostly through fugitive emissions. The same study concluded that a) the integrity of the system was uncertain and safety of the operating personnel and general public was at risk; b) internal corrosion in the pipelines, due to release of sour gas, was the most serious problem; c) in emergency situations the system controls would not have responded efficiently; d) the responsibility of system operation was divided between five gas producing regions and there was a lack of accountability at senior management level; and e) staff expertise required upgrading. The GEF grant was provided to support the system rehabilitation and to help reduce methane emissions as well as large-scale escape of gas due to breakdown and malfunctioning of the system. 3.2 Revised Objective: No revision of the objectives was required as there was a clear perception of likely sector development at the time of project preparation. 3.3 Original Components: The project consisted of the following components: a. Oil and Gas Sector Restructuring. Initiation of the first phase of the oil and gas restructuring program through, inter alia, commercialization and corporatization of CNPC and SPA, introduction of a commercial accounting system, and implementation of productivity enhancement and related human resources development programs. b. Gas Fields Development and Rehabilitation. Involving i) development of proven gas reserves in about fourteen selected gas fields in East Sichuan through drilling of about 100 infill development wells, acquisition of about 8,800 line-kilometers seismic survey and interpretation, construction of surface facilities consisting of gas gathering systems, gas dehydration and formation water treatment units; ii) rehabilitation of old gas wells, about 90 in East Sichuan and 100 in Central Sichuan, through work-over, reservoir stimulation and well re-completion; and iii) provision of state-of-the-art technology, equipment and materials for geophysical surveys, gas well drilling and completion, and production and environmental management. c. Expansion of Gas Transmission and Distribution. Involving construction of desulfurization plants and installation of: i) about 18-20 inch diameter x 35 kilometers long loop line from Fuying to Naxi; ii) about 18 inch diameter x 16 kilometer long loop line from Wubaiti to Jiangzhi; iii) about 18 inch diameter x 71 kilometers long loop line from Wolonghe to Daosuiqiao; iv) about 18-22 inch diameter x 124 kilometers long pipeline from Jiangzhi to Wolonghe; and v) about 10 inch - 3 -  diameter x 40 kilometer long pipeline from Fengjiawan to Wanxian, along with the related corrosion control, measurement and gas control facilities. d. Gas Transmission and Distribution System Rehabilitation. Including: rehabilitation and upgrading of pipelines, measurement, corrosion control, corrosion inhibition, telecommunication, gas control, gas quality monitoring and emergency response facilities of the entire gas transmission and distribution system; deterioration monitoring and evaluation of the transmission and distribution system; environmental upgrades to reduce methane emissions through i) installation of additional valves at the vent stacks of both the gas gathering and transmission systems, ii) installation of chained caps or plugs on open ended pipelines, iii) upgrading or replacement of the seals of control valves, iv) replacement of high performance compressor seals, v) upgrading of the seals of block valves, vi) implementation of comprehensive gas leak detection and repair program including repair or replacement of various types of valves, vii) plugging of open ended lines, and viii) provision of methane emission monitoring equipment; and provision of a supervisory control and data acquisition system (SCADA) for the whole transmission and distribution system. e. Institutional Building. i) Institutional strengthening of SPA through technical assistance and training in modern petroleum technology and management including provision of in-country and overseas training of staff in gas field development, gas transmission and distribution, and financial management, promotion of petroleum development, and tariff setting; and ii) provision of national petroleum education including short and medium term overseas training, lecturing by international experts in China, and teaching materials and computer software. The projected components were directly supportive of the project objectives. The restructuring component, based on an ongoing study, supported the government's intention to carry out a restructuring program outlined in the government's policy letter to the Bank of December 30, 1993. The gas fields development component, based on a reserves assessment study, was to help enhance gas production through the identification and delineation of additional reserves and rehabilitation of existing wells. The gas transmission and distribution expansion and rehabilitation components were formulated to enhance the capacity, safety and efficiency of the gas transportation system and to minimize methane emissions in line with the recommendations of a pre-investment (diagnostic) study of the gas transportation infrastructure. The institutional building component was to strengthen the capabilities of the operating organizations through upgrading the know-how of the staff to promote efficient development of petroleum resource. 3.4 Revised Components: Project components were not revised. 3.5 Quality at Entry: The quality at entry is considered satisfactory. Prior to formulation of the project, studies with the help of international consultants were undertaken on restructuring of oil and gas sector, gas reserve assessment, gas transmission and distribution rehabilitation, environmental impact assessment, and gas allocation and pricing. These studies analyzed issues hampering the development of gas resources, and helped in designing the project and implementation strategies that would promote sustainable development. The letter included institutional restructuring and capacity building, alleviation of energy shortages in an environmentally sound manner, enhancement of safety and reduction of methane emissions. Potential risks to the project were flagged and steps were taken to mitigate these risks in the - 4 -  project design phase and during project implementation. The risks in upstream development, mainly due to complex geology, were to be mitigated by the provision of appropriate modern technology and equipment under the project. In the rehabilitation and upgrading of the gas processing and transportation infrastructure the risks were minimized through the technical collaboration of the implementing agency with an experienced and internationally reputable organization. To ensure financial stability of the investment components, assurances were obtained from the government on the implementation of an action plan for the rationalization of gas pricing and allocation criteria. The project concept and design were endorsed by peer reviewers and the Bank management. (QAG was not in existence.) 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The project's development objectives were fully achieved and in many cases surpassed. Overall project outcome is rated as satisfactory only because of the delayed completion of the upgrading and rehabilitation of the system. (a) Support the restructuring of the Borrower's upstream oil and gas sector. Highly satisfactory. Before restructuring, the China National Petroleum Company (CNPC) was responsible for the development of onshore oil and gas resources and the China National Offshore Oil Company (CNOOC) was responsible for the development of offshore oil and gas resources. CNPC, in addition to being responsible for onshore oil and gas development also exercised some policy and regulation functions. Following a restructuring study carried out under the project in 1994 and other assessment carried out by the Government of China, CNPC and the China National Petrochemical Company (SINOPEC) responsible for oil refining and petrochemical production and marketing of products were restructured into two regional (and afterwards competing) vertically integrated entities responsible for onshore oil and gas development/transportation/marketing and refining/petrochemicals production and products marketing. Core activities of CNPC were consolidated into PetroChina Ltd (PCL), which was registered in November 1999. Non-core activities remained with CNPC through its existing subsidiaries, organized as service companies. Core activities of SINOPEC were consolidated into China National Petrochemical Company (SINOPEC Ltd) with non-core activities remaining with SINOPEC subsidiaries organized as service companies. CNOOC was also restructured with core activities consolidated into CNOOC Ltd and non-core activities remained with CNOOC subsidiaries organized as service companies. By early 2000, the government functions were separated from the business operations of the enterprises. During the transition, the China Association for Petroleum and Chemical Industries was given regulatory oversight. As part of its privatization process, PCL successfully carried out in April 2000 an initial public offering for 10% of its shares in international stock markets (New York and Hong Kong) for a total value of about RMB20 billion (US$2.5 billion). In 2002, PCL reported a revenue of RMB244.4 billion (US$29.4 billion), 1.3% increase over 2001 and a profit of RMB46.9 billion (US$5.7 billion), a 3.2% increase over 2001. SINOPEC, Ltd. and CNOOC, Ltd. were also partially listed in international markets. In 2002, restriction on competition between the three - 5 -  companies was lifted in preparation of the gradual opening of the oil and gas markets to international oil companies beginning in 2005 (WTO commitments). (b) Promote the development and conservation of gas resources in an economic, efficient and environmentally sound manner. Satisfactory. State of the art technology and equipment provided under the project enabled rapid increase in gas production; annual production rose from around 7.0 billion cubic meters in 1994 to around 8.7 billion cubic meters per year by 2002. Modern reservoir management techniques enabled optimal recovery and minimized gas loss. New technologies in geophysical work and reservoir modeling, together with better drilling and well completion techniques enhanced the productivity i.e., enabled PetroChina Southwest Oil and Gas Fields Company (PCL Southwest) to attain its exploration and production goals with fewer wells. With the skills enhanced under the project, PCL Southwest could effectively use 3D seismic, conduct more accurate reservoir studies, and reduce well drilling and completion time. PCL Southwest's proven reserves of natural gas are now estimated at 682 billion cubic meters. At appraisal in 1994, the reserves were estimated at 415 billion cubic meters. The increase of 267 billion cubic meters is far above the appraisal target of 70 billion cubic meters. The target of 8.0 billion cubic meters for annual gas production was achieved by the year 2000 and current production is around 8.7 billion cubic meters per year. PCL Southwest has the capability to produce around 10 billion cubic meters of natural gas per year. At project commencement, almost all of the gas entering PCL Southwest's gas transmission and distribution network was non-specification. With the installation of new facilities and upgrading of old facilities, the entry of non-specification gas in the transportation network has been completely eliminated and since November 2001 PCL Southwest has been in compliance with the Chinese safety rules with regards to the quality of pipeline gas. The scope and methodology of rehabilitation and capacity expansion of the transmission and distribution infrastructure was defined by a diagnostic (pre-investment) study financed under a grant from Global Environmental Facility (GEF). An efficient and cost effective plan emerged from the study, comprising: i) rehabilitation involving inspection, monitoring and evaluation of the system, repair and upgrading of facilities, and replacement as required; ii) capacity expansion, involving installation of additional gas treatment facilities, pipelines, control stations and compressor stations; iii) institution building involving consolidation of all gas transmission and distribution operations into a single organization that will be fully accountable for efficient and safe supply of gas to the consumers; and iv) upgrading staff expertise through on-the-job training under technical collaboration with an experienced and internationally prominent operating organization. Under this plan, upgrading of the system and enhancement of its capacity was achieved by: a) optimal rehabilitation through deterioration monitoring and integrity evaluation, enabling replacement of parts and components rather than outright substitution of whole plants and sections; and b) improvement of control, communication and maintenance capability. This approach maximized technology transfer and skills and minimized the upgrading cost. The plan has been substantially completed (with delay) and the network is now capable of transporting 10 billion cubic meters of gas annually, compared with 6.5 billion cubic meters at project commencement in 1995 and 8 billion cubic meters targeted at appraisal. - 6 -  Following the project environmental action plan, all drilling formation water, wastewater and work-over fluids, process wastewater, and pipeline fluids are treated before appropriate disposal i.e., by re-injection or discharge, and all mud and debris from drilling are treated before mud re-cycling and burial of debris. A total of 942 hectares of land were acquired for project implementation, of which 779 hectares were acquired for temporary use and 163 hectares were for permanent use. The affected parties were appropriately consulted and compensated in accordance with the laws of the People's Republic of China and the regulations of Sichuan Province and Chongqing Municipality. In 2002, PCL Southwest supplied around 8.7 billion cubic meters of natural gas to industrial, commercial and household consumers in Sichuan and the neighboring provinces and thus helped avoid the use of about 6 million tons of coal. In Sichuan's energy consumption, coal now accounts for 50%, hydropower for 35% and natural gas for 15%. (c) Strengthen the institutional capabilities of CNPC and SPA. Satisfactory. In CNPC, institutional strengthening was organized through a program of in-country and overseas training involving several hundred professional staff. Following the restructuring of CNPC, PCL incorporated it in a larger ongoing program commensurate with its needs. Since PCL had sufficient resources, the remaining funds allocated for this purpose were cancelled at Borrower's request. In SPA/PCL Southwest, the capabilities were enhanced through: a) a long-term technical collaboration with SOFREGAZ who deployed a multi-discipline team of experts to provide advice, technical assistance and on-the-job training; b) on-the-job and overseas training with the providers of specialized services; c) consultancy services and studies to review problem areas in gas field development, processing, transportation and marketing: and d) in-country and overseas courses and study tours. Areas in which expertise have been upgraded include: geophysics, seismic data acquisition, reservoir engineering and management, drilling, well stimulation and recovery techniques, gas purification, transmission and distribution, gas systems planning, instrumentation, telecommunication, SCADA, corrosion control, construction techniques, deterioration monitoring and integrity evaluation, rehabilitation management, environmental protection, management information systems, project planning and management, utility management, financial management, gas marketing, tariffs, and gas utilization. Before project commencement, management of SPA's gas transmission and distribution operations was divided amongst its five gas-producing regions. Following the diagnostic study, the transmission and distribution operations under the management of four gas-producing regions were consolidated into a single organization called the Gas Transmission Management Department (GTMD). The operations in the fifth region (East region), however, remained under regional management, now called the Chongqing Gas Production Division (CGPD). On account of political constraints emanating from the separation of Chongqing municipality from Sichuan Province, merger of these operations into GTMD could not be achieved and the coordination between GTMD and CGPD was provided by PCL Southwest's Director of Planning and Development. This consolidation, though partial, still led to a marked improvement in accountability and operational efficiency as evidenced by the successfully coordinated implementation of deterioration monitoring, integrity evaluation, rehabilitation and capacity expansion programs for upgrading the pipeline network. - 7 -  Global Development Objective. Assist the efforts to reduce methane emissions, to enhance the operational efficiency and safety of the gas transmission and distribution in Sichuan, and to strengthen the institutional capabilities of SPA. Satisfactory. As a result of rehabilitation and upgrading works undertaken under the project, entry of non-specification gas into the system has been completely eliminated. Emergency response arrangements have been upgraded. Installation of a supervisory control and data acquisition system (SCADA) is in progress; it was delayed due to SARS and is now due to completed by end December 2003. Fugitive methane emissions from the system have been substantially reduced from an estimated 20,000 tons at appraisal to 390 tons in 1997 and about 50 tons in 2002. Overall, around 170,000 tons of fugitive methane emissions (3.4 million tons carbon dioxide equivalent) have been avoided since the commencement of the project. The Grant funding per ton of carbon dioxide avoided to date amounts to US$2.94. The Department of Environmental Protection, adequately staffed with competent professionals and headed by a Director, is responsible for planning, implementing and monitoring of measures for environmental protection in gas production, purification and transportation as well as monitoring fugitive methane emissions and planning of remedial measures. 4.2 Outputs by components: A. Initiation of the first phase of the oil and gas restructuring program through, inter alia, commercialization and corporatization of CNPC and SPA, introduction of a commercial accounting system, and implementation of productivity enhancement and related human resources development programs. In 1994 a restructuring study was conducted under the project. Following this study, restructuring was initiated in two phases. In 1998, a) two fully integrated onshore oil and gas companies were created, one out of CNPC (the country's largest oil producer- with a capacity of about 2.9 million barrels per day from 20 fields) now called CNPC Group and the other out of SINOPEC, the country's largest oil refiner, with a capacity of about 3.55 million barrels per day from 34 refineries, now called SINOPEC Group, to operate on commercial basis with clear profit targets set by the Government; and b) the China Association of Petroleum and Chemical Industry was given regulatory oversight during the transition period to help separate the sector enterprise functions from Government policy and regulation functions and to promote competition between all companies operating in the sector, in conformity with project's restructuring objectives as stated in the Government's letter to the Bank of December 30, 1993 on oil and gas sector reforms. In 1999, the Government decided to: (a) spin off the technical services from exploration and production; (b) reorganize CNPC and its subsidiaries on the basis of core competencies; and (c) list the core business companies on the stock markets. The producing fields with associated exploration and development, processing, transmission, distribution and marketing activities were transferred to a newly created national oil company