India - Bombay High Offshore Development Project

Document of FiLE COPY The World Bank FOR OFFICIAL USE ONLY RETURN TO REPORTS DESK Report No. P=2062-IN WITHIN ONE WEEK REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INDIA FOR THE BOMBAY HIGH OFFSHORE DEVELOPMENT PROJECT June 20, 1977 This document has a restricted distribution and may be used by recipients only In the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (as of June 14, 1977) Rs 1.00 = Paise 100 US$1.00 = Rs 8.80 Rs 1.00 = US$0.1136 Rs 1 million = US$113,600 (Since September 24, 1975 the Rupee has been officially valued relative to a "basket" of currencies. As these currencies are now floating, the US Dollar/Rupee exchange rate is subject to change. Conversions in the Appraisal Report were made at US$1 to Rs 9.00). FISCAL YEAR April 1 - March 31 ABBREVIATIONS AND ACRONYMS ONGC = Oil and Natural Gas Commission GOI = Government of India BHDP = Bombay High Development Project DCF = Discounted Cash Flow Mmi/y = million metric tons per year Mm /d million cubic meters per day b/d = barrels per day LPG = liquefied petroleum gas POL = Petroleum, Oil, Lubrice,* ,s  FOR OFFICIAL USE ONLY INDIA -- BOMBAY HIGH OFFSHORE DEVELOPMENT PROJECT LOAN AND PROJECT SUMMARY Borrower: India, acting by its President Beneficiary: Oil and Natural Gas Commission Amount: US$150.0 million Purpose: Construction of the facilities required to produce up to 140,000 barrels per day of oil and 2.2 mil- lion cubic meters per day of natural gas from the Bombay High and Bassein oil and gas fields, located about 160 km and 100 km, respectively, west of Bombay, in the Arabian Sea, and construction of facilities to process, transport, store and deliver to users the oil and natural gas expected to be available from these fields at full production. Terms: Repayment over 20 years, including three years' grace, at 8.20% per annum Relending Terms: Maturity not to exceed 20 years, including three years' grace, at 10-1/4% per annum. Estimated Cost: (US$ Million) Local Foreign Total Wells 12.0 37.0 49.0 Well Platforms 9.0 28.0 37.0 Land 4.5 -- 4.5 Pipelines 18.0 149.0 167.0 Processing Platforms 2.5 82.5 85.0 Oil Terminal 17.0 0.5 17.5 Gas Processing Plant 7.0 5.0 12.0 Oil Stabilization Plant 10.0 1.0 11.0 Supply Base 15.0 -- 15.0 Telecommunications 8.0 4.0 12.0 Customs Duty 12.0 -- 12.0 Consulting Services 9.0 28.0 37.0 Base Cost 124.0 335.0 459.0 Physical Contingencies 19.0 51.0 70.0 Price Contingencies 11.0 31.0 42.0 Total Project Cost 154.0 417.0 571.0 This document has a restricted distribution and may be used by recipients onliy is the performance of their official duties. Its contents may not otherwise be dclosed without Wori Bank authorization.  Financing Plan: (US$ Million) ONGC Internal Cash 100.0 GOI Loan/Equity 471.0 of which: IBRD Loan 150.0 Commercial borrowing 50.0* Bilateral assistance 50.0* OIDB Loans 70.0* 571.0 * Estimate Estimated Disbursements: (US$ Million) FY 78 FY 79 FY 80 Total 80.0 63.0 7.0 150.0 Consultants' Services: For design and supervision of construction of the facilities included in the project ........ 11,000 man-months. Rate of Return: 66% (economic) Appraisal Report: No. 1569a-IN, dated June 10, 1977.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INDIA FOR THE BOMBAY HIGH OFFSHORE DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan, in an amount equivalent to US$150 million, to the Government of India (GOI), to help finance the construction of facilities required to produce up to 140,000 barrels per day of oil and 2.2 million cubic meters per day of natural gas from the Bombay High and North Bassein oil and gas fields, and the con- struction of facilities to process, transport, store and deliver to users the oil and natural gas expected to be available from these fields at full pro- duction. Amortization would be over 20 years, including three years' grace, at an interest rate of 8.2% per annum. The proceeds of the loan would be on- lent by the GOI to the Oil and Natural Gas Commission for a period of not more than 20 years, including three years' grace, at an interest rate of 10.25% per annum. PART I - THE ECONOMY 1/ 2. An economic report, "Economic Situation and Prospects of India" (1529-IN dated April 25, 1977), was distributed to the Executive Directors on May 3, 1977. Country data sheets are attached as Annex I. Background 3. India is exceptional among the Bank Group's member countries for its size and diversity; the country is divided into more than 20 States with a population of some 630 million speaking over 60 languages. Since Independ- ence the trend in growth of GNP has been about 3.5% per annum, or a little over 1% per annum in per capita terms, while over the five years 1971/72 - 1975/76 it fell to as low as 2.5% per annum, in spite of the record harvest of 1975/76. This unsatisfactory performance is in part the result of the low availability of investable resources: the net transfer of resources from abroad has never been above 3% of GNP, and fell to as little as 0.8% between 1969/70 and 1973/74; similarly, while India's domestic savings effort compares well with other countries at the same average income levels, the rate has very rarely exceeded 17% of GNP. The investment rate puts India in the lower third of all developing countries. More significant perhaps is the fact that in spite of a marked rise in the: investment rate from about 10% in the early 1950's to about 18% over the past fifteen years, the trend in GNP growth has remained about the same. This indicates a marked decline in the efficiency of capital use, as a result of increasing capacity underutilization, long project gesta- tion, and increased emphasis on relatively capital-intensive projects and sectors. 4. Since Independence the growth of the socio-economic infrastructure (transport, education, health services, etc.) has been impressive, but has 1/ Parts I and II of this report are the same as those in the President's Report on the Periyar Vaigai Irrigation Project (P-2045-IN, dated May 19, 1977).  often been achieved at high cost and has yielded results of variable quality. Many industrial and agricultural investment schemes have been highly success- ful, but others have taken excessively long to be completed and have operated well below full capacity. In some regions of the country, growth and struc- tural change have been rapid and compare favorably with developments in many other parts of the world; in other regions there has been stagnation, and in some, decline. Although national income has increased in most years, there has been no rise in the living standards of the vast mass of rural and urban poor, conservatively estimated at 200 million people with per capita incomes of US$70 per annum (converted at the official exchange rate) and US$250 on a purchasing power parity basis. 5. The structure of the economy has been slow to change. Agriculture remains the dominant sector, with its share of national product declining only gradually from about 50% to 42% over the last twenty years. The share of manufacturing industry has increased only slowly and, since the late 1960's, has remained approximately constant at about 16%. There has, however, been a shift in the composition of manufacturing production, with consumer, inter- mediate, and capital goods now contributing about one-third each, compared with an overwhelming preponderance of consumer goods 25 years ago. Recent Trends 6. In March, 1977, a party other than Congress formed a Government for the first time since Independence. Undoubtedly, changes in economic policies and emphasis will be formulated in the course of the next few months. The state of the economy was not a prominent election issue; in fact the economy was generally stronger than at any time in the last six years. Although the growth of GDP in 1976/77 is not expected to have exceeded 2%, this was on top of the very good growth of 8.8% in 1975/76. Agricultural production is ex- pected to have fallen by about 3%, but only because of the return to a more normal harvest of 110-114 million tons of foodgrains after the record 121 million tons of the previous year. Industrial growth was around 10% in 1976/77, which is significantly above the rates achieved in the late 1960's and early 1970's. Exports continued their bright performance, rising by 18% in US dol- lars and 12% in volume terms. The overall resource position, with record foreign exchange and foodgrain reserves, is exceptionally strong, and gives the Government considerable room for maneuver. 7. In agriculture the bumper crop of 1975/76 was largely due to remarkably good weather conditions; the good crop in 1976/77 - a foodgrain harvest in the region of 110 million tons would be the second largest on record - was produced under generally normal weather. A conspicuous change was the increase in fertilizer use, which rose by more than 20% over 1975/76, following marked declines in fertilizer prices. Industrial production bene- fited from fewer labor disputes, fuller utilization of installed capacity in both private and public sectors, a more liberal import policy, relatively good power availability, and increased demand because of higher consumer incomes, expanded exports and higher public expenditures. However, whole- sale prices,-which had fallen 14% from September 1974 through March 1976,  - 3 - rose 11% from the end of March to December 1976 and continued rising into 1977. It is not yet clear whether this upsurge indicates a new inflationary trend or merely a correction of the previous sharp decline in the relative prices of a range of agricultural commodities. 8. The balance of payments situation has improved dramatically since the 1973-1975 period. In 1975/76 the trade deficit was $1,530 million, which was more than covered by US$1,560 million in net aid, US$205 million in net purchases of currency from the IMF, and US$559 million in net miscellaneous capital and invisibles (mostly private remittances); indeed, this large aggregate net resource inflow led to a US$794 million increase in foreign ex- change reserves, to a level of US$2.2 billion. In 1976/77, the trade deficit is estimated to have fallen by US$1,080 million, due to a rise of US$845 million in exports and also to a fall of US$235 million in imports, primarily because of lower prices and volumes of foodgrains and fertilizer imports. The decreased trade deficit, along with a further increase in the net inflow of miscellaneous capital and invisibles from abroad of US$540 million, more than offset the fall of US$350 million in net aid and the substantial repurchases of currency from the IMF, and allowed a US$1.5 billion addition to reserves, which reached a level of US$3.7 billion at the end of March 1977. Development Prospects 9. The favorable economic situation gives the new Government the op- portunity to address the longer-term constraints on growth. The basic task is to raise the overall rate of growth from its historic range of 3-4%. In the long run this will require raising more resources for investment. But it will also be important to achieve significantly better utilization of avail- able resources, partly through an immediate boost to industrial demand. 10. In agriculture, the basic problem remains that, despite the record foodgrain crop in 1975/76 and the good crop in 1976/77, the long-term growth rate of foodgrain production has been unacceptably low, at about 2.5% per annum over the last seventeen years, and only 2% in the last ten. This has meant that only in good years has there been any margin of production to cater to per capita growth in food consumption, and in normal years it has been necessary to import food. There is considerable scope for stepping up growth both by increasing the use of inputs and by raising the productivity of existing capacity. Three promising developments in regard to the first are the sharply higher outlays on irrigation in the Fifth Plan period along with a renewed determination to complete projects expeditiously; the indica- tions that private investment in tubewells is picking up again after a slow- down in the early 1970's; and the recent recovery of fertilizer demand. With regard to-more productive use of existing capacity, there is increased aware- ness in the Government that the benefits of irrigation projects can be much increased not only through command area development but also through more efficient design and operation of major surface irrigation infrastructure. Also, hopes have been generated for increasing productivity on both irrigated and rainfed farms through a reorganized and improved extension and research system, which has been recently introduced in several States in northern and eastern India.  - 4 - 11. A strong effort to raise agricultural growth is essential, not only to meet food requirements, but also because of the pervasive influence of agriculture on the levels of activity in other sectors of the economy. This effort must also be so structured as to increase the incomes of small and marginal farmers, in order to increase production, since they operate 25% of the cultivated land and account for somewhat more than 25% of production, and for welfare reasons, since they make up about 70% of rural population and constitute the majority of those living below the poverty level. 12. The industrial sector is poised for rapid growth, as the most serious constraints on the supply side have been removed by the improved situation with respect to power, coal and imported raw materials and components. There has been a progressive liberalization of controls and the 1976/77 Central Budget announced a reduction of some taxes on private industry. In many cases management of public enterprises has improved, as is reflected in their markedly higher production and profitability as a group. In the medium term it is the demand for industrial output that will determine industrial growth. In certain industries, export demand will provide a strong pull on production; this is true, for example, for iron and steel, certain chemicals, some electrical equipment, processed agricultural products, and vehicles. But the impact of increased exports on overall industrial demand will grow only slowly given the current low share of exports in sales. If the higher growth and productivity in agriculture discussed earlier were to materialize, it would provide a significant stimulus to industry. It is difficult to specify the linkages explicitly; but because of the large share that agri- culture holds in GNP, the coefficients do not have to be large for agricul- tural growth and the concomitant growth in demand for industrially produced inputs and mass consumption goods to boost overall industrial demand signi- ficantly. A higher public deficit and increased public investments are the instruments most directly under Government control, and also those that can increase demand for industrial products most immediately. The interim budget of the new Government moves strongly in this direction with a 240% increase in the planned budget deficit over 1976/77. 13. Improvement in the supply of energy augurs well for India's ability to meet the needs of a more rapidly growing economy. Organization- al and transportation problems in the coal industry have largely been over- come; production is sufficient to meet demand, stocks are comfortable, and the industry has good prospects for meeting both domestic and export demand. Supply of electricity continues to be a concern, because of the vulnerability of hydro power to variations in the monsoon and the continued existence of local shortages, even when the overall power situation is satisfactory. But the severe power supply constraints of the past have been relaxed for the moment at least, and several institutional improvements promise to reduce the future incidence of shortages: underutilization of capacity has been virtually eliminated in well-established power stations; progress has been made in the organized exchange of power between States thus relieving local- ized power shortages; and the problems of slow implementation of power invest- ment due to delayed delivery of materials and equipment have virtually dis- appeared. In addition, the delays caused by the inability of State Electricity  Boards to finance projects expeditiously have been eased by their improved financial position following tariff increases, and by increased Plan outlays by the Central Government. The medium-term prospects for the oil and gas sector have been further improved by major new finds of oil and gas near the large offshore Bombay High field. Crude oil from Bombay High was brought to shore for the first time in May 1976; production reached an annual rate of 2 million tons by March 1977, and will rise to a level of 12-13 million tons by 1982/83. Although India will continue to import crude at or somewhat above the current level, much of the foreign exchange burden of rapidly rising imports will be avoided by the development of these resources. Prospects are also bright for further discoveries offshore, given the current high level of exploration activity. 14. Underlying all other development issues is that of population. Al- though India's population growth rate of a little over 2% is not high in com- parison with most LDCs, the size of the absolute increment - 13 million annually - is daunting. It appears, however, that population growth may have passed its peak in the 1960's, and it is expected to continue to slow down, both because the birth rate will continue to decline and because the death rate will not fall as steeply as in the past. With a sustained family planning effort, it should be possible to lower the population growth rate to 1.1% per annum by the end of the century. Our "best guess" projection of India's population by 2000 is 880 million. Many of the benefits of family planning policy will only be felt beyond the turn of the century, but the decline in fertility will bring about an early change in the age structure of the popu- lation. The school age group will grow more slowly or not at all after 1981, thereby reducing the pressures on the primary and secondary education system. The labor force, however, will continue to grow at a fast rate until the end of the century. 15. India's balance of payments position should be comfortable for the next few years. The combination of past global inflation and increased ex- ports have reduced the proportion of export earnings needed for debt service from 30% in 1970/71 to 16% in 1976/77. The ratio is not likely to rise above this level in the next few years. Given continuing favorable policies, the volume of exports should continue to grow by 7% to 10% annually in the near future; and import needs for fertilizer, POL and foodgrains will continue to require a diminishing propor,tion of available foreign exchange. The large inflow of private remittances shows no immediate signs of declining and should continue to bolster the foreign exchange position in the medium term. Imports, including a variety of capital goods, have already been liberalized signifi- cantly. Increased public investment and a revival of the domestic economy is likely to generate substantial additional import demand. However, this should be quite manageable, given the currently comfortable foreign exchange position, bright export prospects, and continuation of the current real level of net aid. The present situation presents an opportunity to raise the level of investment and, consequently, reach a more satisfactory level of long-term growth.  - 6 - PART II - BANK GROUP OPERATIONS IN INDIA 16. Since 1949, the Bank Group has made 50 loans and 85 development credits to India totalling US$1,762 million and US$4,338 million (both net of cancellation), respectively. Of these amounts, US$816 million has been repaid, and US$1,432 million was still undisbursed as of May 31, 1977. Annex II contains a summary statement of disbursements as of May 31, 1977, and notes on the execution of ongoing projects. 17. Since 1957, IFC has made 14 commitments in India totalling US$58.4 million, of which US$13.0 million has been repaid, US$7.6 million sold and US$6.9 million cancelled. Of the balance of US$30.9 million, US$24.4 mil- lion represents loans and US$6.5 million equity. A summary statement of IFC operations as of May 31, 1977 is also included in Annex II (page 2). 18. In recent years, the emphasis of Bank Group lending has been on agriculture. The Bank Group has been particularly active in supporting minor irrigation and other on-farm investments through agricultural credit opera- tions. Major irrigation, marketing, seed development, and dairying are other agricultural activities supported by the Bank Group. Also, the Bank Group has been active in financing the expansion of output in the fertilizer sector and, through its sizeable assistance to development finance institutions, in a wide range of geographically scattered medium- and small-scale industrial enterprises. IDA financing of industrial raw materials and components for selected priority sectors has been instrumental in facilitating better capa- city utilization in industry. The Bank Group has also been active in sippor- ting infrastructure development for power, telecommunications, and railways. Family planning, education, water supply development, and urban investments have also received Bank Group support in recent years. 19. The direction of assistance under the Bank/IDA program has been consistent with India's needs and the Government's priorities. The emphasis of the program on agriculture, industry, power, urban development and water supply remains highly relevant. Projects designed to foster agricultural production through the provision of essential inputs such as credit for on-farm investments, command area development of existing irrigation schemes, intensification and streamlining of extension systems, and seed production form an important aspect of the Bank Group's program for the next several years. Special emphasis will be given to projects benefiting small farmers. Projects supporting water supply, sewerage, and urban development also form an integral part of the Bank's lending strategy to India for the next several years. Lending in support of infrastructure and industrial investments will focus on agriculture-, export- and energy-related projects. 20. The need for a substantial net transfer of external resources in support of India's economy has been a recurrent theme of Bank economic re- ports and of the discussions within the India Consortium. Thanks in large part to the response of the aid community, India has successfully adjusted to the changed world price situation. However, the basic need for readily  - 7 - usable foreign exchange assistance, to augment domestic resources, assure effective utilization of existing capacity, stimulate investment and accele- rate economic growth, remains. As in the past, Bank Group assistance for projects in India should include, as appropriate, the financing of local expenditures. India imports relatively few capital goods because of the capacity of the domestic capital goods industry. The import component of projects tends to be especially low in such high-priority areas as agricul- ture, education, and family planning. For the Bank Group to be able to make an appropriate contribution to the financing of projects in these sectors, it is important to cover a proportion of local expenditures. 21. It is clear from the review of the Indian economy that as much as possible of India's external capital requirements should be provided on con- cessionary terms. Accordingly, the bulk of the Bank Group assistance to India has been, and should continue to be, provided from IDA. However, the amount of IDA funds that can reasonably be allocated to India remains small in relation to India's needs for external support, and some Bank lending to India, for which the country is creditworthy, is appropriate. As of May 31, 1977, outstanding loans to India totaled US$973 million, of which US$494 million remained to be disbursed, leaving a net amount outstanding of US$479 million. 22. Of the external assistance received by India, the proportion con- tributed by the Bank Group has grown significantly. In 1969/70, the Bank Group accounted for 34% of total commitments, 13% of gross disbursements, and 12% of net disbursements as compared with an estimated 58%, 24% and 29%, respectively, in 1975/76. On March 31, 1976, India's outstanding and disbursed external public debt was US$13.1 billion, of which the Bank Group's 'share was 25%. The Bank Group's share is expected to remain around this level in the future. Because Bank Group assistance to India is predominantly in the form of IDA credits, debt service to the Bank Group will rise slowly. In 1975/76, about 15% of India's total debt service payments were to the Bank Group. PART III - THE OIL AND GAS SECTOR 1/ 23. India's total demand for commercial primary energy has grown at an average annual rate of 6% over the past ten years, but per capita consumption remains very low; it was only 11% of the world average in 1975. India's energy policy is predicated on the maximum economic use of domestic resources, mainly coal. India's total coal reserves are estimated at 83,000 million metric tons, which should be sufficient to cover the country's coal needs for the next 50 years. These reserves are being developed very rapidly; production is projected to increase from the current level of about 100 million tons to 350 million tons by 1990, with a total investment estimated at US$7 billion over 15 years. 1/ India's energy sector was reviewed by the World Bank in 1974 (Volume II of Report No. 402-IN, dated May 7, 1974) and the oil and gas sector in 1976 (Report No. 1172-IN, dated May 11, 1976).  - 8 - 24. The share of oil and natural gas in total commercial energy supply grew from 21% in 1965 to 32% in 1973; it has remained constant since, as a result of steps taken to limit consumption after the price increases of 1973- 74. India's petroleum consumption is low and limited for the most part to sectors where other sources of energy cannot be substituted economically, with the result that there is little scope for further reducing demand without constraining economic growth. Thus hydrocarbons (oil and natural gas) are of critical importance to India's development efforts, accounting for about one- third of the total commercial energy supply and for about 25% of the country's import bill. The performance and prospects of the oil and gas sector are a highlight of the Indian economy over the past two years. Major new offshore strikes west of Bombay in the Arabian Sea have led to the delineation of fields with proven and probable recoverable reserves estimated at about 250 million tons of crude oil and about 30 billion cubic meters of natural gas. These fields have more than doubled India's known reserves of crude oil and in- creased the potential availability of natural gas by over 50%. 25. The potential oil-bearing structures offshore Bombay were first identified by seismic survey in 1966, but no exploration took place for almost eight years, since offshore oil was not thought to be competitive with imported supplies at pre-1973 prices. Since 1974, these finds have been developed with striking rapidity. Commercial production from Bombay High, a structure located about 160 km west of Bombay, began in May 1976, slightly over two years from the sinking of the first exploratory well, and reached a level of 40,000 barrels per day (2 million tons per year) by March 1977. In 1976, two more major fields were discovered at Bassein, about 60 km east of Bombay High and virtually on the direct pipeline route to Bombay; produc- tion from the Bassein North field is expected to begin in December 1978, when pipeline transportation facilities are available and the production platform is completed. 26. Responsibility for exploration and development in the Bombay High area has been assigned by the Government to the Oil and Natural Gas Commis- sion (ONGC), a statutory body which was established in 1959. Three other offshore areas are being explored under production-sharing contracts in which ONGC has a working interest: the Kutch Basin by Reading and Bates (U.S.), the Bay of Bengal by Natomas (U.S.), and the Cauvery Basin by Asamera (Canada). ONGC is also responsible for the major share of onshore exploration and deve- lopment. Of the 8.4 million tons of oil produced onshore in 1976/77 (all in the States of Assam and Gujarat), ONGC was responsible for about 63%; Oil India Limited, a joint sector company, for 36%; and Assam Oil Company, a sub- sidiary of the Burmah Oil Company, for about 1%. 27. The development plans for Bombay High and Bassein North call for increasing production from the current level of 2 million metric tons per year (Mmt/y) to 4 Mmt/y by December 1977, and to 10 Mmt/y by December 1981. Onshore, production from known oil fields is expected to increase from 8.4 million tons in 1976/77 to 9.4 million tons in 1980/81. Thus, total avail- ability of domestic crude oil from known fields should increase from almost  - 9 - 9 Mmt/y at present to about 19.4 Mmt/y by the end of 1981. Current explora- tion efforts, both offshore and onshore, may well result in the discovery of new fields which could be brought into production in the 1980's. Although another field at Bassein South is expected to contain large amounts of free gas, the development of this field will await the completion of detailed reservoir engineering studies and the construction of facilities to utilize profitably this valuable resource. 28. As a result of the slow growth of the economy and of Government measures to limit consumption of refined products, which was growing at a trend rate of 8-9% in the period before the oil crisis, consumption of petro- leum products declined from 22.5 million tons in 1973 to 21.8 million tons in 1974. It grew by about 3% in 1975/76 and by 6-7% in 1976/77 to about 24 mil- lion tons. The volume of petroleum imports declined from almost 18 million tons of crude equivalent 1/ in 1973/74 to about 17.4 million tons in 1974/75, 16.2 million tons in 1975/76, and 16.9 million tons in 1976/77. The import bill rose from US$719 million in 1973/74 (compared with US$265 million in 1972/73) to US$1,451 million in 1974/75 and an estimated US$1,627 million in 1976/77. 29. Even with a low rate of overall economic growth in India, consump- tion of petroleum products will exceed the combined production of existing onshore fields, Bombay High, and Bassein North, which is expected to peak at about 26.5 million tons in 1985. If overall growth were to increase to, say, 6% per annum, the annual growth in consumption of petroleum products could easily rise again to 9%; this would involve the consumption of about 50 mil- lion tons of crude equivalent by 1985, with imports of some 23.5 million tons (valued at US$2.3 billion at present oil prices), in spite of the projected rapid increase in domestic production. 30. As warranted by the highly profitable investment opportunities and large unexplored prospective areas which currently exist, exploration and development programs have been sharply stepped up, and the oil and gas sector has taken an increasing proportion of Plan outlays. Total expenditures for exploration, development and refining included in the Fifth Five-Year Plan (1974/75 - 1978/79) are Rs 16.9 billion, or 4.3% of total Plan outlay. Of this amount, ONGC was to get Rs 10.6 billion, or 62%, but this is very likely to be exceeded -- perhaps by 50% or more. It is too early to determine the extent to which the Bombay High project will affect the share of ONGC, or of the oil and gas sector as a whole, in total Plan expenditures, since this depends on evolving needs in the sector as well as other developments in the economy. However, it is likely that the proportion of total Plan expenditure allocated to ONGC alone will rise from under 2% in 1974/75 to over 5% in the last two years of the Plan period. 31. India's policies with respect to the development of the oil and gas sector changed from an almost total reliance on foreign oil companies after 1/ Crude oil imported as such and refined products expressed in the quantity of crude required to produce them.  - 10 - Independence to a strong emphasis on self-reliance until the oil crisis of 1973-74. Recently, India has followed a policy which, while it continues to stress national autonomy, has increased cooperation with foreign oil companies. Negotiations with a view to acquiring the assets of foreign companies in India have been successful, and settlements have been reached in all cases. The Government now owns more than 85% of total refining capacity in India and has a controlling interest in the remainder. Although ONGC has become India's principal organization for exploration for and development of hydrocarbons, its pragmatic attitude toward foreign expertise is indicated by the production- sharing contracts mentioned in para 26 above and by its regular use of foreign consultants (para 41). 32. The proposed project would be the Bank Group's first lending opera- tion in the Indian petroleum sector. However, the Bank Group has been in- volved in the energy sector since 1950. The Bank Group has made 17 loans and credits totalling US$749.1 million for power generation and transmission and two loans totalling US$47.4 million for coal production. At the request of ONGC, the Bank's initial involvement in this sector -- in the preparation of terms of reference for studies of the utilization of natural gas -- has been extended to an association with every critical step in the preparation of the proposed project. ONGC's field for further expansion, particularly offshore, is wide open, and, through the proposed project, the Bank will continue to advise ONGC regarding its expansion program, including project evaluation methods and the marshalling of the large financial resources required for the future development of the sector. PART IV - THE PROJECT 33. The proposed project was appraised by a mission which visited India in January/February 1977. The appraisal report (No. P-1569a-IN, dated June 10, 1977) is being distributed separately to the Executive Directors. Negotiations were held in Washington in May 1977. The Borrower was represented by Mr. B.B. Vohra of the Ministry of Petroleum and Mr. Vineet Nayyar of the Ministry of Finance, and ONGC by Mr. N.B. Prasad, Chairman, and Mr. P.T. Venugopal, Member (Finance). Project Description 34. The proposed project is the third phase of ONGC's development pro- gram for the Bombay High offshore area (including Bassein North) and consists of the construction of facilities required to produce up to 140,000 barrels per3day (b/d) (7 Mmt/y) of crude oil and 2.2 million cubic meters per day (Mm Id) of associated natural gas, and to process, transport, store and deliver to users the oil and natural gas expected to be available from these fields at full production (240-260,000 b/d). The principal components include: about 20 additional development wells, about 5 well platforms, three production plat- forms equipped with processing and pumping facilities, two subsea pipelines to shore, an onshore terminal including gas and oil processing and storage facilities, supply lines to the users of the oil and gas, a supply base for  - 11 - ONGC's offshore operations, a telecommunications system, and consulting services. The project is expected to begin in the Fall of 1977 and to be completed by May 1979. The pipelines and supply lines are scheduled for completion by May 1978, before the start of the monsoon. This schedule is tight but manageable. 35. Bombay High crude is temporarily being transported to shore by tanker, using a single-buoy mooring system. Although this system is capable of transporting up to 80,000 barrels per day of oil, it has two major draw- backs: the associated natural gas must be flared offshore, and the system cannot operate during the extreme weather conditions which prevail during the monsoon period (June - October), requiring shut-down of the entire field. Moreover, production capability is expected to exceed the capacity of the existing transportation system after December 1977. 36. The crude oil produced by Bombay High and Bassein North will be substituted for imported supplies to domestic refineries. Because of the technical characteristics of the Bombay High crude, some modifications are required at existing refineries. The two major refineries at Trombay, which are the first concerned, have already completed most of the necessary adjust- ments, and other refineries will complete them during the project implementa- tion period. Any delay in refinery modification would not have adverse effects on the project, as the crude oil could be easily exported at international prices. The associated gas will be used as feedstock in the Trombay fertilizer complex of the Fertilizer Corporation of India, where the necessary modifica- tions are being undertaken. Liquefied petroleum gas (LPG) will be bottled at the Trombay refineries, where facilities exist for handling and storage, and sold for domestic and commercial use. Studies concerning the possible utili- zation of additional associated gas which may become available and free gas at Bassein South are underway with the assistance of consultants (Stone and Webster, U.S.). Project Cost and Financing 37. The project cost, including contingencies (US$112 million), is estimated at US$571 million, of which US$417 million, or 73%, represents foreign exchange costs. Taxes and duties account for about US$12 million of the total. 38. The proposed loan would provide 26% of the total project cost and 36% of the foreign exchange costs. In addition, the Government has indicated its intention to borrow about US$50 million from commercial banks toward the financing of the project and to utilize official bilateral aid to the extent it is available for use in a manner consistent with optimal project implemen- tation. GOI representatives estimate that US$50-100 million in bilateral aid may be available for the project from countries including Japan, France, Germany and the U.K. About US$100 million is expected to be available from ONGC's internal resources and about US$70 million in loans from India's Oil Industry Development Board over the next two years; The balance would be made available by the Government from its own resources. The Government has under- taken to cover promptly all of ONGC's financing requirements, including its working capital requirements (Section 3.02 of Loan Agreement).  - 12 - Procurement and Disbursement 39. The goods and services financed under the proposed loan would be procured in accordance with the Bank's guidelines. All contracts would be awarded on the basis of international competitive bidding, except that, sub- ject to prior approval of the Bank, items with limited sources of availability, whose timely supply is critical to efficient project execution and which are estimated to cost US$2 million or less, may be procured on the basis of quo- tations from short lists of suppliers, provided that the aggregate value of such contracts does not exceed US$7.5 million. The proceeds of the loan would be disbursed against 100% of the c.i.f. cost of construction of the subsea pipelines (US$70 million) fabrication and erection of two well platforms and one processing platform at Bassein North and of one processing platform in the northern part of the Bombay High field (US$65 million), and construction and equipment of the gas fractionating plant (US$10 million). US$5 million would be unallocated. The contracts against which the loan proceeds would be dis- bursed were selected on the basis of their suitability for international compe- titive bidding and their timing (i.e., items for which tenders had been issued without prior Bank review were excluded). ONGC's normal procurement procedure for foreign supplies requires worldwide bidding similar to the Bank's proce- dures; it is expected that this procedure will be applied for imported equip- ment and services not financed from the proceeds of the Bank loan. Project Implementation 40. ONGC is responsible for project implementation. The Commission, which was established by an Act of Parliament in 1959, consists of a Chair- man and not less than two nor more than eight members appointed by the Gov- ernment. At the present time, there are four full-time members (Exploration, Production, Finance and Materials), and two part-time members (Secretary (Economic Affairs), Ministry of Finance, and Secretary (Petroleum), Ministry of Petroleum). As of January 1977, ONGC's total staff was 23,000, including 1,500 engineers and technicians. ONGC's administrative and financial func- tions are centralized in the corporate headquarters at Dehra Dun; its opera- tional staff is divided among three Regional offices and the Bombay High Development Project (BHDP), whose headquarters are in Bombay. The staff of BHDP, which was created in 1973/74, is now about 600 people, mostly engineers and technicians. 41. The BHDP staff are experienced and technically competent in off- shore oil and gas development. In addition, consultants have been employed for the design and engineering of most of the project facilities: Pipeline Technologists (U.K.) for the pipelines and supply lines; Engineers India Ltd., in collaboration with Crest Engineering (U.S.), for the production/processing platforms; Peter Fraenkel and Partners (U.K.) for the supply base; and Burmah Oil Engineering (U.K.), in collaboration with the Post and Telegraph Department of the Ministry of Communications and the Telecommunications Branch of the Ministry of Defense, for the telecommunication system. Engineering consul- tants for design and supervision of construction of the onshore processing/ storage terminal have been nominated. ONGC has agreed to take all action  - 13 - necessary to acquire as and when needed the land and rights of way required for construction of the project facilities (Section 2.10 of Project Agreement); the necessary legal formalities are well underway, and ONGC can begin con- struction prior to the completion of these formalities. 42. Although ONGC has been remarkably successful in developing the Bombay High field, ONGC management recognizes the need to improve BHDP's capabilities to handle a project which is far larger and more complex than what has been done so far. Accordingly, ONGC is transferring experienced personnel from onshore operations to the project staff and is hiring addi- tional qualified engineers. The Commission has also appointed a Project Manager and sub-project managers, and is in the process of appointing consul- tants to assist in the establishment of appropriate management procedures for the implementation of the project. ONGC has agreed to establish a satisfactory management information system for the Bombay High project by December 31, 1977 (Section 2.06 of Project Agreement); this would be one of the first tasks of the project management consultants. ONGC has undertaken a program to meet additional staff training needs, which the Bank has reviewed and found satis- factory. ONGC has also agreed to submit to the Bank an updated development plan of the Bombay High and North Bassein fields by the end of each calendar year starting in 1977 (Section 2.05 of Project Agreement). 43. All necessary precautions will be taken during design and construc- tion of the project to minimize the ecological hazards associated with the production facilities, pipelines and the offshore and terminal facilities. ONGC is procuring a vessel outfitted for offshore fire-fighting and oil spill clean-up, and the Indian Coast Guard service will assist in any offshore oil emergency. All manned platforms will be equipped for fire-fighting and with emergency escape and survival systems, and the North Sea safety regulations will be adopted during construction. ONGC Finances 44. ONGC's financing requirements which are not met from internal cash generation are provided as follows: exploration expenditures through equity contributions from the Government, and development expenditures through loans, primarily from the Government (at 10-1/4% interest for 10 years including 4 years' grace) and the Oil Industry Development Board (at 4.5% interest for 15 years including 2 years' grace). An exception to this rule is Bombay High development, for which 50% of the financing required is provided in the form of equity. The Government sets prices for crude oil and natural gas at a level which enables ONGC to cover its operating costs, including depreciation, to service its debt and to finance a reasonable share of its development program. 45. ONGC's production of crude oil increased at an average rate of 12.5% per annum over the period 1973/74 - 1976/77; together with an increase in the price it received for crude oil, this led to an increase in revenues from Rs 816 million (US$90.6 million) to an estimated Rs 1,450 million (US$161 million) over the same period. ONGC's cash generation enabled it to finance  - 14 - about 49% of its capital investment requirements, including those of Bombay High, after meeting its debt service and its need for additional working capital, in the four-year period. 46. The prospects arising out of India's first major offshore dis- covery open a new era for ONGC in which its capital expenditures and cash flow requirements will increase considerably. On the basis of present prices and conservative estimates of production from existing onshore and offshore fields, ONGC's revenues are also expected to rise as can be seen in the table below, from Rs 1,941 million (US$216 million) in 1977/78 to Rs 6,082 million (US$675 million) in 1981/82. The annual rate of return after taxes on average invested capital is projected to average about 12% after completion of the project, and ONGC is expected to be able to finance about 57% of its capital investment requirements from internal cash generation. Over the period 1977/78 - 1981/82, ONGC's debt/equity ratio is projected to be not more than 42/58. Thus, ONGC's overall financial situation, including its liquidity and its debt management, has been and is expected to remain sound. Years ending March 31 Crude oil production (Mmt) 7.3 10.2 13.3 16.5 18.5 Revenues - Rs millions 1,941 2,991 3,979 5,351 6,082 Operating Income After Taxes 168 564 1,030 1,986 1,766 Operating ratio - % 91 81 74 63 71 Rate of return on average invested capital - % /a 2.5 5.8 8.4 14.1 11.7 Rate of return on average net fixed assets - % 4.7 9.3 11.4 18.8 15.5 Debt/Equity ratio 42/58 42/58 41/59 34/66 29/71 Debt service coverage times 2.7 3.4 3.8 4.5 4.0 47. Consumer prices for petroleum products in India have been set, with few exceptions, above international prices and fully reflect the scarcity value of petroleum. The producer price set by the Government is the main parameter in ensuring that ONGC's profitability and cash flow objectives are met. Accordingly, ONGC has agreed that it will prepare and furnish each year to the Government an economic and financial evaluation of the project and of any subsequent major development, which will indicate the price levels required for ONGC to earn a discounted cash flow (DCF) financial return of at least 15% after taxes on the project and on any subsequent major development. The GOI has agreed that it will review, on the basis of this report, the price of oil and gas produced by ONGC with a view to determine the price levels needed to enable ONGC, under conditions of efficient operation, to meet its operating expenses and earn a return on its invested capital sufficient to cover its debt service requirements, maintain adequate working capital and finance a substantial portion of its proposed capital expansion. (Section 4.03 of Project Agreement and Section 4.02 of Loan Agreement). ONGC will have its accounts and financial statements audited by an independent auditor and will submit these to the Bank. (Section 4.02 of the Project Agreement).  - 15 - 48. The Government has established well-head prices to ONGC of US$5/ barrel of offshore crude oil, US$55/thousand cubic meters for natural gas, and US$90/ton for liquid petroleum gas (LPG). The DCF financial rate of return of the project, at these prices, is projected to be 19.8%. Thus, the current price of US$5/barrel is adequate to cover production and explora- tion costs and to generate a reasonable profit to ONGC after taxes. Project Benefits and Risks 49. Using the prices established by the Government for gas, which are comparable to international prices, and the present international price of US$13/barrel for crude oil, the proposed Bombay High Development Program yields an economic rate of return of about 66%. This result is less sensitive to variations in costs than to delays in implementation; thus, a 20% cost in- crease would bring the return to 56%, while a one-year delay would bring it to 50%, which is still quite satisfactory. 50. The risks normally associated with hydrocarbon development projects are compounded for offshore ventures by weather conditions. However, over the years the industry has developed techniques and technologies which, if they do not eliminate risks, reduce them to an acceptable level. The tech- nical solutions selected by ONGC have been proved reliable, and ONGC's con- sultants and contractors have considerable experience in the design and construction of offshore and onshore facilities. ONGC's staff is qualified and experienced in all the facets of oil and gas production, processing and utilization and, therefore, the risk of errors in design and/or operation is minimal. Weather conditions, however, are not predictable and may cause delays despite the precautions taken to avoid major construction work off- shore during the monsoon. 51. There is also a risk that the fields will not live up to ONGC's expectations. It is impossible to fully predict the behavior of a reservoir, and fields have been known to "dry up" much sooner than expected. ONGC has been careful and conservative in its approach to the evaluation of the fields and has used experienced consultants to assess both the reserves and the production mechanisms. All estimates are consistent and show that the fields should eventually produce more than was anticipated originally. Continuous monitoring by ONGC, assisted by reservoir engineering consultants, of the behavior of the reservoirs will provide sufficiently advanced warning of any problems for ONGC to take remedial actions. As part of the appraisal, the Bank engaged an independent firm of reservoir engineering consultants (De Golyer and MacNaughton), whose opinion fully confirms ONGC's estimates of reserves and proposed development program. PART V - LEGAL INSTRUMENTS AND AUTHORITY 52. The draft Loan Agreement between India and the Bank, the draft Project Agreement between the Bank and ONGC, the Recommendation of the Committee provided for in Article III, Section 4(iii) of the Articles of  - 16 - Agreement and the text of a draft Resolution approving the proposed loan are being distributed to the Executive Directors separately. 53. Special conditions of the Project are listed in Section III of Annex III. 54. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATIONS 55. I recommend that the Executive Directors approved the proposed loan. Robert S. McNamara President June 20, 1977  ANNEX T Page I f 4 1MJ * SOCIAtL INDICATORS DATA StECT L AND ARNA (THOU 1. . . ........ RI..* E 5 (.I.9.*.0.) ....... IOIDIA, REFERENCE COUN.TRIES (90 ?OTAL 3280. MOST RECET AQTC 1780,7 1960 1970 ES TITAT INDONESrA PHILIPPINEA BRAZIL GNP PER CAPITA (0U5) 70.0 1710.0 150,0 1. 7.0 23J,o 5-- .0 ........ ........................- POPULATION AND VITAL STATISTICS 'OPUL4T104 (bID*PV. MILLtON41 934.0 94,.6 605.1 116.3 36.9 92., PER SQUARE ~~~~M 133.0 167,0 1S5.0 61.0 123.0 11.0 PER IS '40CULTURAL LAND 152.0 30