India - Bombay High Offshore Development Project

Report No. 1569a-IN FILE C3 PtY Appraisal of Bombay High Offshore Development Project India June 10, 1977 Regional Projects Department South Asia Regional Office FOR OFFICIAL USE ONLY U Document of the World Bank 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 Except where otherwise indicated, all figures are quoted in Indian Rupees (Rs) Rs 1.0 = US$0.111 Rs 9.0 = US$1.00 Rs 1,000,000 = US$111,111 WEIGHTS AND MEASURES 1 Metric Ton (mt) = 1,000 Kilograms (kg) 1 Metric Ton (mt) = 2,204 Pounds 1 Kilometer (km) = 0.62 Miles 1 Ton of oil equivalent (Toe) = 10 million Kilocalories 1 American barrei (b) = 0.15899 Cubic meter 1 Cubic meter (m ) -= 6.289 Barrels 1 Cubic foot (cf) = 0.02832 Cubic meter All conversions from tons to barrels are based on a crude oil of average specific gravity of 0.84, or 37 degrees API PRINCIPAL ABBREVIATIONS AND ACRONYMS USED GOI - Government of India ONGC - Oil and Natural Gas Commission MPC - Ministry of Petroleum and Chemicals MOF - Ministry of Finance BHDP - Bombay High Development Program HPCL - Hindustan Petroleum Co. Ltd. FCI - Fertilizer Corporation of India OIDB - Oil Industry Development Board AOC - Assam Oil Company OIL - Oil India Ltd. LPG - Liquefied Petroleum Gas BH - Bombay High BN - Bassein North l INDIAN FISCAL YEAR April 1 - March 31  -FOR OFFICIAL USE ONLY INDIA APPRAISAL OF BOMBAY HIGH OFFSHORE DEVELOPMENT PROJECT Table of Contents Page No. SUMMARY AND CONCLUSIONS ........ . . . . ................. ......... . . . i-iii I. INTRODUCTION ............................................ t .............. 1 II. BACKGROUND ..................................................... ... 0... 2 A. General ..... ..................... .... 2 B. Past and Projected Demand and Supply of Commercial Energy . ............. .. ......... . . 2 III. THE OIL AND GAS SECTOR .................................. 5 A. Historical Development ............ ................. 5 B. Recent Developments ................................ 7 C. Longer-Term Perspectives ........................... 8 D. The Role of the Bank ............................... 9 IV. THE PROGRAM AND THE PROJECT ............................. 9 A. Main Characteristics of the Bombay High Area .......................................................... 9 B. The Development Program ................... *...* .... 10 C. Status of Development .............................. 11 D. The Project ........................................ 11 E. Status of Engineering .......................... 12 F. Cost Estimates ...... ............................... 13 G. Items Proposed for Bank Financing .................. 15 H. Financing Plan ..................................... 16 I. Project Execution, Supervision and Reporting ....... 16 J. Procurement and Disbursement ............ ........... 18 K. Right-of-Way and Land Acquisition ............. 18 L. Operations and Training ........................ .. 18 X. Ecology and Safety .19 N. Project Risks. . 19 0. Further Expansion of the Bombay High Offshore Area 20 T his document has a restricted distribution and may be use by recipients only in the perforrnuie of their ofhciol duties. Its contents may not otherwise be disck3ed without World Bank authorization.|  -2- Page No. V. JUSTIFICATION .................................. . 00 .......... 20 A. General ............................... o......... ...o ....... .... o . 20 B. Sector Objectives ... o ........ .... .. . .. ..... 21 C. Justification of the Bombay High Offshore Development Program ... ........................ 22 D. Economic Justification ........................... 24 VI. THE OIL AND NATURAL GAS COMMISSION ..................... 26 A. General .. ...................... ... .... . . 26 B. Organization and Management . . .......o .......... 26 C. Operations .... ........ o. oo ...... o ............ 28 Do Insurance .. .................... . .... . ...... oo. 29 E. Finances ............. oo .... .... .... 29 F. Audit ......... o...... ooo ........................ 29 G. Prices . .. ...... o..o .............oo 30 VII. FINANCIAL ASPECTS ...o ...... .o... .. .... .... . ... ..o. . ..... 30 A. Introduction. .......... o....o ........o ....... 30 B. Present Financial Position ......no.... ............. 31 C. Financing Plan.. ........... . .. . . . . 32 D. Future Finances ................... oo..o .......... 34 VIII. RECOMMENDATIONS ... o .....o..oo ..... o.................... 35 I'  -3 - LIST OF ANNEXES 1. Bank Group Projects in the Energy Sector 2. Glossary of Technical Terms 3. Past Commercial Energy Production and Consumption 4. Energy Demand Projections 5. Development of Energy Resources of India 6. Past Petroleum Production and Consumption 7. Development of Hydrocarbon Resources in India 8. Evaluation of Bombay High and Bassein Reserves 9. Details of Engineering Evaluation 10. Capital Cost Estimate 11. Procurement and Construction Schedule 12. Projected Program Disbursements 13. Estimated Schedule of Disbursements 14. Environmental Impact 15. ONGC - Organization Chart as of December 31, 1976 16. Bombay High Offshore Development Project - Organization Chart 17. Particulars of the Insurance Coverage Maintained by ONGC for Bombay High Development Project as of January 1977 18. Notes and Assumptions to Financial Statements and Projections 19. Consolidated Financial Statements for the Period 1973/74 - 1981/82 - Income Statements 20. Consolidated Financial Statements for the Period 1973/74 - 1981/82 - Balance Sheets 21. Consolidated Financial Statements for the Period 1973/74 - 1981/82 - Sources and Applications of Funds 22. Financial Viability of the Bombay High Offshore Development Project 23. Assumptions Used in the Economic Evaluation 24. Utilization of the Crude Oil, Natural Gas and Natural Gas Liquids MAP S IBRD 12774 Oil and Natural Gas Sector - Production and Exploration IBRD 12775 Bombay High Offshore Area.  t  INDIA APPRAISAL OF BOMBAY HIGH OFFSHORE DEVELOPMENT PROJECT SUMMARY AND CONCLUSIONS i. In 1975 India's total internal demand for commercial energy was estimated at 93.2 million tons of oil equivalent, of which petroleum accounted for about 24%. Per capita consumption was about 11% of the world average. Despite maximum economic use of its domestic energy resources (coal, hydro- power and more recently petroleum and natural gas), India has not achieved energy self-sufficiency and has to import about 62% of its petroleum require- ments. Following the increase in world oil prices of 1973/74 and subsequent years, the cost of petroleum imports rose from US$265 million in FY73 to about US$1.6 billion in FY76 when they accounted for about 25% of total imports. Energy demand projections show that, despite conservation and development of alternative sources of energy (mainly coal), demand for petroleum will con- tinue to grow in the future. Total requirements are estimated at about 50 million tons in 1985 and 67.5 million tons in 1990 compared to 22.3 million tons in 1975. ii. Current production of crude oil and natural gas is about 8.9 mil- lion tons and 2,300 million cubic meters, respectively, and comes mainly from onshore fields in Gujarat and Assam. Total onshore reserves are estimated at about 230 million tons of oil, sufficient to meet about 10 years of cur- rent requirements. India's onshore potential has been partially explored but no exploration of the Continental Shelf took place before 1973 since it was thought that offshore oil would not be economical at pre-1973 prices. In 1973/74 the GOI decided to step up oil exploration offshore and entrusted this responsibility to the Oil and Natural Gas Commission (ONGC), a statutory body created in 1959, which had been exploring for and developing hydrocarbon resources onshore. In 1974 ONGC drilled its first offshore exploratory well in the Bombay High structure, located 160 km offshore Bombay, and struck oil. Subsequent drilling led to the discovery of the North and South Bassein fields located some 100 km west of Bombay. As of March 1977, proven recoverable offshore reserves are estimated at about 280 million tons of oil equivalent, of which 90% is crude oil and 10% natural gas. The Bombay High and Bassein North fields should yield up to 13 million tons of oil equivalent at maximum production. ONGC is competent to undertake the development of these two fields and has hired Compagnie Francaise des Petroles (CFP) to assist their own staff in reservoir engineering studies. Bombay High and Bassein North production will be substituted for crude oil imports and is expected to bring about net savings of US$16 billion over the next 20 years. iii. ONGC has already carried out the first two phases of development of Bombay High. Commercial production started in May 1976 and reached two million tons per year in March 1977. The project for which the Bank assist- ance is requested consists of Phase III of the development program, which was approved by the government in May 1977. It includes drilling of about 20  - ii - development wells and the construction of about five well platforms, three processing platforms, two subsea lines to shore, subtransmission lines and onshore facilities. Design of the pipeline is completed and the contract for pipes has been awarded. Tender documents for construction of the pipeline and of the first processing platform have been issued; those for the Bombay High and North Bassein platforms should be issued shortly. iv. The project cost is estimated at US$571 million of which 73% (US$417 million) is foreign exchange. The cost estimates are based on ONGC's histori- cal costs for drilling and well platforms, and consultants' estimates for major infrastructure. Physical and price contingencies of about 15% and 8%, respectively, have been applied. v. A Bank loan of US$150 million to the Government of India is proposed for a 20-year term including three years of grace; it would cover 26% of the total cost of the project. The balance will be financed from ONGC's own resources, Government equity and loans, bilateral aid, loans from the Oil Industry Development Board, and commercial borrowing. The Government has agreed to relend the proceeds of the Bank loan to ONGC for a period of not more than 20 years including three years of grace at an interest rate of 10-1/4% per annum. The Government has also undertaken to cover promptly all of ONGC's financing requirements, including its working capital requirements. vi. ONGC, with the assistance of consultants, will be responsible for carrying out the project and is competent to do so. ONGC has agreed to hire management consultants to assist in the establishment of adequate project management procedures and a management information system prior to December 31, 1977. Construction of the project is expected to start in the fall of 1977 and be completed in 1979. This schedule is tight but manageable. vii. The proposed Bank loan will finance the foreign exchange cost of the construction of the two subsea pipelines and of the construction and equipment of two well platforms, two processing platforms and the gas process- ing plant. Procurement of the Bank-financed items will be according to inter- national competitive bidding. ONGC's procurement procedures, which are satis- factory, will be used for all other items. viii. The project presents ecological risks inherent to offshore petroleum development, but ONGC has taken steps to ensure that design and construction will be of appropriate standards. A preliminary study of the environmental impact of the project has been carried out and will be supplemented by an in-depth study to be financed by UNDP. Adequate protection against sea and air pollution is included in the project. ix. ONGC is a large organization with a staff of more than 23,000. Its methods of operation are generally adequate. ONGC is implementing a comprehensive training program for offshore operations. In the course of  - iii - project preparation a number of institutional issues were identified and discussed with ONGC and the GOI. Satisfactory steps have been taken to resolve these issues, particularly in planning and budgeting and staffing of the offshore project organization. x. ONGC's financial situation has been satisfactory in the past, and the GOI has taken the necessary steps to raise the price of crude oil to ONGC when required. Financial projections show that ONGC will generate sufficient funds to repay its debt and contribute toward the cost of future oil and gas development. Since the GOI has decided to finance the development of Bombay High by equity and borrowings in equal ratios, ONGC's debt/equity ratio will remain satisfactory and will leave a margin for further borrowings. xi. The GOI has set the price of offshore crude oil at US$5/barrel. At this price the development of Bombay High should yield a discounted cash flow (DCF) return to ONGC of about 19.8%, which is satisfactory. The GOI has agreed that it will carry out from time to time a review of the price of the oil and gas produced by ONGC to determine the price levels needed to enable ONGC, under conditions of efficient operation, to meet its operat- ing expenses and earn a return on invested capital sufficient to cover its debt service requirements, maintain adequate working capital and finance a substantial portion of its proposed capital expansion. ONGC has agreed that it will prepare and furnish each year to the GOI an economic and financial evaluation of the project and of any subsequent major development which will indicate the level of price required for ONGC to earn a DCF return of at least 15% and which will also provide information on ONGC's future financial performance. In the light of ONGC's past and projected performance, it is expected that ONGC's financial viability will be reflected in rates of return on invested capital of 10 to 14%, a capacity to self-finance 30 to 50% of its development expenditures and an annual debt service coverage of 2 to 2.5 times. It is expected that prices which would ensure a DCF return of 15% would bring about at least-such results. xii. The development of Bombay High will increase India's domestic energy resources and drastically reduce its dependence on imports. Oil and gas will be used in domestic refineries, fertilizer and other indus- trial plants. The Bombay High development program would yield an economic return of 165% if sunk costs are excluded; this return would be 66% if sunk costs are included. The return is less sensitive to variations in program costs than to delays in production. A delay of one year would reduce the return (including sunk costs) to 50%, which would still be very satisfactory. xiii. Subject to the recommendations in Chapter VIII of this report, the project is suitable for a Bank loan of US$150, million to the Goverament of India for a 20-year term including three years grace.  t  I. INTRODUCTION 1.01 The increases in the world oil prices in 1973/74 and in subsequent years have led a number of countries to reassess their energy supply policies and to look more intensively for domestic sources which could be substituted for imports. In India, which imports 62% of its petroleum requirements, the impact of the oil crisis on the balance of payments was very severe. The cost of petroleum imports rose from US$265 million in 1973 to US$1.6 billion in 1976, when they accounted for about 25% of total imports. Since India's petroleum consumption is low and limited to sectors where other sources of energy cannot economically be substituted for petroleum, there is little scope for reducing petroleum imports by developing alternative sources of energy. The Government decided, therefore, to concentrate on developing indigenous petroleum resources, particularly offshore where potential oil-bearing struc- tures were known to exist but had not been explored since they were not deemed commercial at pre-1973 prices. The Government entrusted the responsibility for offshore exploration to the Oil and Natural Gas Commission, a statutory body created in 1959, which had been exploring for and developing hydrocarbon resources onshore. In 1974 the Commission drilled its first exploratory well in the Bombay High structure, located 160 km offshore Bombay, and struck oil. Subsequent drilling led to the discovery of the North and South Bassein fields 100 km west of Bombay. The development of Bombay High proceeded rapidly; commercial production started in May 1976 and rose to about two million tons per year by March 1977. As of March 1977 proven recoverable reserves are estimated at about 250 million tons of oil and 30,000 million cubic meters of gas, which could yield up to 13 million tons of oil per year and 1,500 mil- lion cubic meters of gas per year, at peak production. 1.02 In February 1976, the GOI requested the Bank to provide guidance in a study of the utilization of natural gas and natural gas liquids to be produced at Bombay High. A Bank mission visited India to assist in,the pre- paration of terms of reference for this study, and at ONGC's request extended its assistance to the preparation of terms of reference for a feasibility study of facilities required to produce, transport and process the oil and gas production of Bombay High. In 1976 the GOI requested Bank financing for the development of the Bombay High (BH) and Bassein North (BN) fields. 1.03 The proposed project will be the first project in the Indian oil and gas sector in which the Bank is involved. 1/ It includes the drilling of development wells and the construction of production, processing, transport and storage facilities required to utilize the oil and gas production of the BH and BN fields. The total cost of the project is estimated at US$571 million, of which 73% is foreign exchange. A Bank loan of US$150 million is recommended to finance the foreign exchange cost of the construction of two subsea pipelines, and the construction and equipment of two processing plat- forms, two well platforms and a gas processing plant. 2/ The Borrower will be the Government of India which will relend the proceeds of the loan to the Oil and Natural Gas Commission. 1/ Annex 1 provides a list of Bank Group-financed projects in the energy sector. 2/ Annex 2 provides a glossary of technical terms used in this report.  -2- 1.04 The present report is based on the conclusions of a preappraisal mission in October-November 1976 and of an appraisal mission in January- February 1977 consisting of Messrs. P. Bourcier (Economist), J. Chang (Financial Analyst), L. Forget (Lawyer), H. Schober (Engineer) and R. Williams (Financial Consultant, U.S.). The estimation of the hydrocarbon reserves is based on two reports by DeGolyer and MacNaughton (Consultants, U.S.), which were commissioned by the Bank. II. BACKGROUND A. General 2.01 A striking feature of energy consumption in India is the very large share of non-commercial energy in total energy supply. In FY71, the total share of non-commercial fuels (animal and vegetable wastes, firewood, char- coal, etc.) was estimated 1/ at 58% of total final consumption, the remainder being divided among coal (16.5%), electricity (15.7%) and oil (9.8%). Tenta- tive projections by various institutions and individuals in India and other countries indicate that, while demand for non-commercial energy will decrease in relative terms in the future, it will continue to increase at about the same annual rate as the population. B. Past and Projected Demand and Supply of Commercial Energy 2.02 In 1975, per capita consumption of commercial primary energy in India was .157 tons of oil equivalent (Toe), or 11% of the world average. Over the past ten years total demand for commercial primary energy grew from 51.8 million Toe (MToe) to 93.2 MToe at an average rate of 6% per annum (Annex 3). Energy elasticity to GNP, over the same period, was 1.85, com- pared to an average of 1.4 for developing countries in the same income group. The main consuming sectors are the mining, manufacturing and transport sec- tors, which together account for about 78% of total demand. The remainder is divided among residential and commercial (12.5%), agriculture (4.5%) and others (5%). Since 1965 the sectoral distribution of energy demand has not changed substantially. Demand projections by the GOI Fuel Policy Committee 2/ indicate that demand for commercial primary energy should grow at a somewhat faster pace (8%) in the future to reach about 300 MToe by 1990 (Annex 4). On the basis of these projections (which take into account the effect of the 1/ P.D. Henderson. India: The Energy Sector. 1974. 2/ Fuel Policy Committee Report, 1974.  -3.. increase in world oil prices in 1973/74), per capita consumption should reach .350 Toe by 1990, which would be equivalent to the per capita consumption of Brazil in the early 1970's. 2.03 India's energy policy is predicated on the maximum economic use of domestic resources, mainly coal and hydropower and, since the late 1950's, pet- roleum and natural gas. (i) Coal 2.04 India's total coal reserves are estimated at 83,000 million metric tons (Mmt) which should be sufficient to cover the needs of India for the next 50 years under current assumptions of economic growth. Most coal seams are concentrated in the northern and north-eastern parts of the country. The coal sector is largely nationalized. Current coal production is about 100 Mmt and is expected to increase substantially in the future to reach about 135 Mmt by the end of 1978, and about 350 Mmt by 1990. The total investment required to bring about this level of production is estimated at US$7 billion, spread over a period of 15 years. Most of the coal is used in power genera- tionr (35%), steel industry (20%), other industry (15%) and railways (10%). (ii) Hydropower and Nuclear Fuels 2.05 India's hydroelectric power potential has been estimated at 41,000 Megawatts (MW) based on a 60% load factor, of which 8,000 MW will have been developed at the end of the Fifth Plan period (March 1979). The current share of hydroelectric generation in total generation is 40% and is expected to decrease to about 35% by 1990. India's resources of nuclear fuels consist mainly of uranium and thorium, the former being used for the generation of electric power. On the basis of current reserves, uranium supplies would meet the demand for only a limited time, depending on the rate at which nuclear facilities are built. Currently nuclear power generation accounts for only 2% of total generation but is expected to reach about 10% by 1990. (iii) Hydrocarbons 2.06 India has a large prospective area onshore (1.7 million sq. km) which has only been partly explored. Its offshore prospective area (.3 mil- lion sq. km) is currently under active exploration. By the end of 1974 a total of about 330 Mmt of hydrocarbon reserves had been discovered onshore, of which 70% were crude oil and 30% gas. Cumulative production to date is about 100 MToe. In 1974 and 1976 the Bombay High and Bassein fields were discovered. Proven reserves to date are estimated to be about 280 MToe of which 90% are crude oil and 10% gas. Other hydrocarbon-bearing structures in the same area are still under evaluation (Annex 5 and para. 4.01). Crude oil production in FY77 was 8.9 Mmt of which about .5 Mmt was offshore; it covered about 38% of total in ernal demand (Annex y); natural gas production is about 2,300 million m (Mm ), of which 1,300 Mm are used in fertilizer and  -4- other industries; the remainder is used on the fields or is flared because there is no accessible market. Onshore production is concentrated in two States: Assam in the northeast and Gujarat in the northwest. Petroleum is mainly used in transportation (49%), the residential sector (28%) and industry (11%) . 2.07 Despite the preferential use of coal, the share of oil and natural gas in total commercial energy supply grew steadily from 21% in 1965 to about 32% in 1973. It has remained constant since, as a result of the increase in the domestic price of refined products and of the steps taken to increase coal production and to substitute coal for liquid fuels, wherever feasible. Domestic production of petroleum has not kept pace with requirements, and India's petroleum imports grew from 9.3 Mmt in 1965 to 15.4 Mmt in 1975 at a cost of US$1.6 billion, equivalent to 24.5% and 34.5% of total merchandise imports and exports, respectively. It is projected 1/ that the share of petroleum products will be contained to about 20 to 30% of total primary energy requirements, which appears reasonable. On this basis petroleum demand in India (for fuel and non-energy use) should reach about 50 Mmt by 1985. At that time, the combined production of existing onshore fields and of BH and BN should peak at about 26.5 Mmt, thus covering about 53% of total requirements compared to 38% at present. Unless other fields are discovered and brought into production, India's imports requirements would then be about 23.5 Mmt at a cost of US$2.3 billion at present oil prices. (iv) Non-conventional energy prospects in India 2.08 Recently the Indian Government has shown considerable interest in developing the use of bio-gas (methane produced from organic waste) as a source of energy in rural areas. Even large-scale development would have little effect on the demand for commercial energy since it would substitute principally for non-commercial fuels. The potential for the use of solar water heaters for domestic and small-scale commercial use exists but has not yet been developed. In the future solar energy may substitute for commercial fuels to some extent, but is more likely to meet an energy demand which would otherwise remain un- fulfilled. Investigations of the geothermal potential are being carried on in the Himalayan foothills, but the scope for large-scale geothermal develop- ment in India is limited by unsuitable geological conditions in most of the sub-continent, and its overall effect on the energy situation is likely to be marginal at best. 1/ From Report of the Fuel Policy Committee, 1974, and Second India Studies: Energy (K. Parikh - 1976).  -5- III. THE OIL AND GAS SECTOR A. Historical Development 3.01 According to the GOI's Industrial Policy Resolutions of 1948 and 1956, the development of the oil and gas sector is the responsibility of the Central Government, and private firms are given a secondary role except when their intervention is deemed to be in the national interest. Over time, India's policies regarding the development of the oil and gas sector have changed from an almost total reliance on foreign oil companies after Inde- pendence to a strong emphasis on self-reliance until 1973/74. Recently, India has followed a policy of compromise between national autonomy and cooperation with foreign oil companies. (Annex 7 provides a historical over- view of India's policies regarding the development of the oil and gas sector.) 3.02 Today the oil and gas sector consists mainly of public and semi- public enterprises under the Ministry of Petroleum and Chemicals. Over the past 30 years, the relative importance of these enterprises has varied accord- ing to the resources that were available to them or to the role that they could play in India's petroleum supplies. (i) Refining and Marketing 3.03 In 1948 India was almost totally dependent on imports of refined products. However, the GOI soon realized that future economic growth would lead to ever-increasing demand for petroleum and that the reliance on imports of refined products would be costly. The GOI therefore approved the con- struction of domestic refineries, owned, supplied and operated by foreign com- panies. This decision was a departure from the Industrial Policy Resolution (1948); however it was expected that it would save foreign exchange 1/, pro- vide expertise in the petroleum field and encourage oil companies to explore for oil in India. This policy was followed until the early 1960's when the GOI realized that existing supply contracts with foreign companies prevented India from taking full advantage of the overall decrease in oil prices that was taking place at that time. The GOI then decided to take over the pro- curement of part of its crude oil requirements, to limit the expansion of private refineries and to create sufficient public refining capacity to use whatever crude oil it could obtain at lower cost. This led to the construc- tion of several public refineries, with the assistance of Eastern European countries, which were integrated into the Indian Oil Corporation in 1964. By 1970 public refineries accounted for about 60% of the total crude oil throughput. 3.04 Following the increase in world oil prices of 1973/74, the GOI decided to limit domestic consumption of petroleum to the minimum compati- ble with the projected economic growth. Among other things, this policy 1/ Several studies indicate that from 1955 to 1960 India saved some US$150 million by refining imported crude oil rather than import- ing petroleum products.  - 6 - included drastic increases in the prices of refined products and a plan to maximize the production of middle distillates (kerosene, diesel and gas oil) which are in short supply. At the same time the GOI entered into a series of negotiations to acquire part or all the assets of foreign companies. These negotiations have been completed successfully and the GOI now owns more than 85% of total refining capacity and has controlling interest in the remainder. (ii) Exploration and Development 3.05 Oil was first discovered in India by the Assam Oil Company (AOC) in the 1880's. AOC produces very small quantities of oil from a virtually de- pleted field in Assam. It is not active in exploration, and the GOI is cur- rently negotiating its takeover. 3.06 The first major steps towards the exploration for and development of hydrocarbon resources in India were taken in the early 1950's when the GOI entered into joint ventures with Standard Vacuum Oil Company and with Burmah Oil. The former, known as the Indo-Stanvac Project, was terminated in 1960 without positive results. The latter was successful in discovering oil in the north-east and led to the creation of Oil India Ltd. (OIL), in which the GOI had a participation of 33% initially which was increased to 50% in 1960. OIL's production started in 1959 and reached 3 Mmt in 1970; it has re- mained constant since. 3.07 In the late 1950's, the GOI decided to increase exploration. This decision was based upon the conclusions of Indian geologists, con- firmed by a panel of international experts, that India's prospective area was under-explored and that the potential for oil discovery was good. In 1959 the GOI created the Oil and Natural Gas Commission (ONGC), which was given the task of exploring for and developing petroleum resources in India, outside the areas being prospected by OIL. ONGC started operations with the assistance of experts from the USSR, and soon after (January 1961) discovered oil and gas in Gujarat. ONGC's production started in 1961, reached 1.1 Mmt in 1965, 3 Mmt in 1970 and 5.7 Mmt in 1976. ONGC-'s initial success was not followed by the discovery of any significant oil and/or gas reserves onshore. The increase in world oil prices, however, led the GOI to intensify its search for domestic oil and to promote exploration offshore. This effort was successful and resulted in the discovery of Bombay High in 1974 and of Bassein North and South in 1976. 3.08 ONGC has become India's main organization for the exploration for petroleum and natural gas. It has exclusive rights to undertake and/or supervise these activities onshore (except in the areas allocated to OIL) and offshore. ONGC is a large organization with considerable experience in on- shore operations. Until recently ONGC's experience offshore was limited to some shallow-water fields in Gujarat.  -7- B. Recent Developments 3.09 The increase in the world oil prices of 1973/74 led to a drastic increase in the cost of petroleum imports and introduced the need for a reappraisal of earlier programs for exploration and development and for long-term supply of petroleum. The Report of the Fuel Policy Committee (1974) analyzes the consequences of higher petroleum prices and makes the following policy recommendations: (i) steps should be taken to reduce the cost of production of petroleum products; (ii) steps should be taken to improve the long-term security of supply; and (iii) imports of petroleum should be reduced by substituting other fuels (coal) for petroleum and by increasing the indigenous production of crude oil. To achieve these objectives, the Fuel Policy Committee recommended inter alia an optimization of the refining pattern to meet the projected product demand mix at least cost, the negotiation of long-term supply agreements with OPEC countries and the possibility of developing oil resources in the Middle East, and an intensification of exploration in India, particularly offshore where the most promising prospects were located. 3.10 The policy followed by the GOI since 1974, which is analyzed in detail in World Bank Report 1172-IN 1/ and summarized below, is generally in line with the Fuel Policy Committee's recommendations. The GOI has taken steps to increase petroleum product prices and rationalize refinery operations and expansion. It has also negotiated supply contracts with Iraq and Iran, and ONGC has entered into joint venture and service contracts in Iraq, Iran and Tanzania; The contract with Iran should provide about .7 Mmt per annum of participation crude oil. Other foreign ventures may be considered in the future. The most dramatic steps, however, were taken in exploration for and development of domestic hydrocarbon resources and particularly in the explora- tion and development of the offshore potential. ONGC's exploration program onshore was expanded considerably. Offshore, first priority was given to the development of the Bombay High and Bassein North fields which mark a turning point in India's oil industry. In addition, the GOI decided to open ten offshore areas to foreign exploration under production-sharing contracts. Three contracts, in which ONGC has a working interest, were signed with Reading and Bates (U.S.), Natomas (U.S.) and Asamera (Canada) to explore in the Kutch Basin, the Bay of Bengal and the Cauvery Basin, respectively. The first exploratory wells were sunk in 1975 and 1976 but no commercial discovery has yet been made. 1/ India, The Oil and Gas Sector. May 11, 1976.  -8- 3.11 This increase in domestic exploration and development activities, which will be carried out almost entirely by ONGC, is reflected in the suc- cessive increases in the Plan allocation to the oil and gas sector. The revised Fifth Plan target for exploration, development and refining during the Plan period is Rs. 16,913 million (US$1,879 million), or 4.3% of total Plan outlay. ONGC's allocation, which was originally Rs. 6,940 million (US$771 million), is currently estimated at Rs. 10,561 million (US$1,173 million), equivalent to 62% of the sector's total expenditures excluding petrochemicals. But even this amount, which is greatly increased over the draft Fifth Plan, both in real and relative terms, is likely to be exceeded. From a total FY75 Plan outlay of over Rs. 800 million, ONGC's Plan expendi- tures rose to over Rs. 1,800 million and Rs. 2,800 million in FY76 and FY77, respectively. 3.12 ONGC's current Five-Year Plan provides for the expansion of its onshore activities to reach a production of about 33.3 Mmt over the Fifth Plan period compared to 19.4 Mmt in the previous one. This will be achieved mainly by introducing secondary recovery wherever feasible. In addition, survey work, exploratory and development drilling will be intensified. Modern digital equipment and computer facilities are being introduced, and by March 1979, the number of drilling rigs will be increased by 19. Drill- ing targets for FY78 are 294,000 meters compared to 191,000 in FY75. The total cost of the onshore program through FY79 is estimated at about Rs. 3,600 million (US$400 million). 3.13 Offshore, the emphasis will be on the completion of the development of Bombay High and of North Bassein. The cost of this program, including price contingencies, is estimated at US$1,774 million. The program, which is described in Chapter IV, will be implemented by ONGC with the assistance of outside consultants and contractors. The proposed project for which a Bank loan of US$150 million is recommended consists of Phase III of the offshore development program. C. Longer-Term Perspectives 3.14 India has a large prospective offshore area which needs to be explored and developed as soon as possible to offset future increases in the cost of petroleum imports. However, the time frame in which this poten- tial can be developed depends largely on the resources which are allocated to the oil and gas sector and on ONGC's capability to manage a much larger exploration and development program in the future. The GOI is aware of this and has taken steps to secure a reliable resource base for the oil and gas sector. Crude oil prices have been set at a level which will ensure that ONGC will generate sufficient resources internally to finance a reasonable share of the Bombay High and North Bassein development. In addition the GOI has given high priority to the financing of the offshore program from Central Budget resources and from the Oil Industry Development Board, created in 1974 to assist in the financing of oil and gas projects, and is also mobilizing alternative sources of financing (bilateral aid and commercial bank loans) (para. 7.07).  D. The Role of the Bank 3.15 The discovery and development of Bombay High has presented the GOI and the Commission with technical and managerial challenges to which they have responded in a pragmatic way. However, further developments will require further improvement in ONGC's managerial and technical capabilities, particularly in long-term planning and budgeting. The Bank has been involved in the preparation of the Bombay High Development Project (BHDP) and, can continue to assist ONGC by providing advice on project evaluation methods currently used in the oil industry. ONGC is instituting managerial and financial improvements in offshore operations, and Bank involvement in the proposed project can also be useful in this regard. IV. THE PROGRAM AND THE PROJECT A. Main Characteristics of the Bombay High Area 4.01 The Bombay High and Bassein fields are located some 160 km and 100 km, respectively, offshore Bombay. They are part of a number of struc- tures which were identified during a seismic survey in 1966 and which are currently under-exploration. The Bombay High field was discovered in 1974 and the Bassein field in 1976. -Map 12775 shows the location of these fields. 4.02 Total proven recoverable reserves of oil are currently estimated at about 250 Mmt, using primary and secondary recovery techniques (depletion, gas lift and water injection). In addition it is estimated that the Bombay High and Bassein North fields could yield an additional 85 Mmt of oil when probable reserves currently under evaluation have been confirmed. For the purpose of this report, only proven reserves have been considered. Reserves esti- mates are based on studies made by ONGC, the Indian Institute of Petroleum Exploration and foreign consultants (Geoman, U.S., and Compagnie Francaise des Petroles, France) and on an independent evaluation carried out by DeGolyer and MacNaughton (consultants, U.S.) at the request of the Bank. The results of these studies are summarized in Annex 8. 4.03 According to these studies, Bombay High maximum production should reach about 225,000 barrels per day (b/d) of crude oil and about 3.4 Mm3/day of associated gas by 1982. These projections are based on a production ex- perience of about 12 months and are considered reasonable. The maximum production of Bassein North is currently estimated at about 40,000 b/d which is considered conservative. Continuous review of reservoir behavior will be  - 10 - required during the life of the field, to optimize development and hydrocar- bons recovery. ONGC geologists have extensive experience in reservoir engi- neering but are not familiar with this type of reservoir (limestone forma- tion). ONGC has entered into a four-year contract with Compagnie Francaise'' des Petroles (CFP), whereby CFP will assist ONGC staff'in the interpretatiorn' ' of seismic data, in mathematical reservoir modelling and in production optimi- zation using primary and enhanced recovery techniques. ONGC has 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. B. The Development Program 4.04 On the basis of existing reserves studies ONGC, the potential'users and their consultants have prepared plans for the development and utilization of the crude oil and natural gas to be produced in the Bombay High area untt 1982. '" 4.05 ONGC's development program was approved by the Commission in January 1977, at a meeting attended by the Secretary (Economic Affairs),. Ministry- of Finance and the Secretary (Petroleum), Ministry of Petroleum and chemicals. These plans call for development in five phases. Phases I and II; ..' ch ea.X almost completed, consist of the construction of the production,f'acilitie X (wells, well and production platforms) required to reach a productlon.'cap''- ity of 80,000 b/d (4 Mmt/year) by the end of 1977 and of the constructionffof0 temporary tanker transport facilities to bring crude oil to shore. Duing - Phase I and II all the associated gas will be flared offshore. Phase IIf-was approved by the Government in May 1977 and consists of the drilling of a 20 development wells and the construction of about five well platforms to-6~,t, 2_, reach a production of 140,000 bld by the end of 1978, as wellt as the. const - tion of three processing platforms, permanent pipeline transport faciilties~ and shore facilities. Phase IV and V will consist of the constructione of additional facilities to reach a production of 265,000 b/d by 1982, in ing the drilling of about 60 to 70 development wells and about.30: waterin- jection wells and the construction of the corresponding well platforms- andX i processing facilities. The entire program is expected to extend into ithe,i early 1980's at a total cost estimated at US$1,774 million, of vhich DS204' million will be for Phase I and II, US$571 million for Phase III I/:a 'iI US$999 million for Phases IV and V. 4.06 The crude oil and natural gas produced at Bombay High and Bassein lW North will be substituted for imported crude oil supplies to domestic 're'-2 + ';.2.';^ fineries and used in fertilizer and other industrial plants. Because of-,'`.- 1/ The cost of Phase III as approved by the Government is US$593.3 million, but it includes interest during construction which is not included in:', the Bank's estimates.  - 11 - the characteristics of the Bombay High crude oil (high wax content, high pour point), some modifications are required at existing refineries. The Trombay refineries, which are the first concerned, have already completed most of the revamping and other refineries are expected to carry out the necessary adjustments during the execution of Phase III. Current plans are to use the associated gas in the Trombay fertilizer complex of the Fertil- izer Corporation of India (FCI). The decision to convert some units to natural gas at FCI's Trombay plant has already been taken and further gas utilization studies are being carried out with the assistance of Stone and Webster (Consultants, U.S.). Liquefied Petroleum Gas (LPG) will be used in the residential and commercial market. C. Status of Development 4.07 The first phase was completed in March 1977, three months behind schedule because of unexpected problems in the driving of piles for one platform. It consisted of the drilling of ten development wells and of-the construction of three well platforms and one, production platform in the northern part of the Bombay High field to achieve a production of 40,000 b/d. It also included the construction of two Single Buoy Moorings to anchor a storage tanker and a shuttle tanker. This temporary transportation system permitted commercial production to start in May 1976, but had to be inter- rupted during the monsoon. The second phase, which is essentially identical to the first, is virtually completed and total production from Bombay High will reach 80,000 b/d by the end of 1977 as planned. During Phase I and II most of the exploratory and development drilling was carried out by contrac- tors under the supervision of ONGC Offshore Operations Division (para. 4.19). Construction of the well platforms and of two production platforms was carried out by McDermott (Contractors, U.S.) under the supervision cf ONGC's Offshore Construction Division (para. 4.19). D. The Project 4.08 The project comprises Phase III of ONGC's development program and includes the facilities listed below. Annex 9 gives a detailed description of the project facilities and of the operations for which they are required. (i) Development drilling. About 16 production wells will be drilled at Bombay High North and 4 at Bassein along with the necessary well platforms. Four deviated wells draining an area of about 6 sq. km. will be drilled from each platform. These will be connected by subsea gathering lines to the main processing plat- forms.  - 12 - (ii) Processing platforms. A total of three processing platforms will be installed, two in the northern part of the Bombay High field and one at Bassein North. The BH platforms will have a combined capacity of 160,000 b/d and the capacity of the BN platform will be 60,000 b/d. (iii) Subsea pipelines. Two 209 km subsea pipelines, 30" and 26" in diameter, will be laid to transport oil and gas, respec- tively. (iv) Onshore terminal. The two subsea pipelines will terminate at Uran (in the Bay of Trombay), where a terminal will be built, including a crude oil stabilization unit, a gas processing plant and storage facilities, from which the crude oil will be pumped to the Trombay refineries. Ex- isting pipelines between Butcher Island and Trombay will be used to load the crude aboard tankers for shipment to coastal refineries or for export. (v) Supply lines. Four different supply lines, 8" to 30" in diameter, will cross the Bay of Trombay to connect the Uran terminial to the various users. (vi) Supply base. Berthing facilities for supply vessels, repair shops, warehouses, administrative buildings and offices will be built at Nhava Sheva, a site recently acquired by ONGC. (vii) Telecommunications and control. A telemetric communica- tion and control system will be installed to cover the entire Bombay High program. (viii) Engineering and technical services. Consultants have been or will be engaged to prepare detailed engineering designs, supervise construction and assist ONGC in overall project management. E. Status of Engineering 4.09 The Phase III facilities are based on a feasibility study prepared in 1976 by Pipe Line Technologists (PLT), Consultants, UK. This study defined the main parameters of the pipelines, processing platforms and onshore facil- ities. In addition ONGC retained Engineers India Limited (EIL) in collabora- tion with Crest Engineering (U.S.) to carry out additional studies on the Bombay High North and Bassein North processing platforms. These consulting organizations were subsequently assigned to engineer, design and assist in the supervision of the construction of the pipelines and interim platform (para. 4.20) (PLT) and of the Bassein North and Bombay High processing plat- forms (EIL/ Crest).  - 13 - 4.10 PLT have completed design and procurement documents for the two sub- sea pipelines, the land and harbor supply pipelines and the interim processing platform at Bombay High North. Contracts for pipe and related materials have been awarded. Bids have been received for the interim platform and are being evaluated. The pipe construction bid documents have been issued and contract awards are scheduled for the latter part of July 1977. 4.11 EIL/Crest are designing the Bassein North process platform and are scheduled to have bid documents ready for issue by July 1977. They will then design and prepare bid documents for the Bombay High North platform for which bid invitations are scheduled to be issued during August 1977. 4.12 Engineering consultants for the onshore terminal at Uran have been selected. It is expected that the crude oil stabilization, oil storage and pumping portion of the work will be assigned to Humphreys and Glasgow (Con- sultants, U.K.) after the GOI has approved the contract. A consulting firm must still be selected for the gas processing plant, but there is no immediate urgency in starting this work. 4.13 Peter Fraenkel and Partners (Consultants, U.K.) have been given engineering and design responsibility for the Nhava Sheva supply base. Tele- communication and control facilities have been assigned to Burmah Oil Engi- neering and the Defense Ministry. All engineering consultants engaged by ONGC are experienced and qualified for the tasks assigned to them. ONGC has agreed that they will continue to use consultants whose qualifications, experience and terms and conditions of employment are satisfactory to the Bank, until the completion of the Project. F. Cost Estimates 4.14 The Project cost is estimated at US$571.0 million, including con- tingencies and customs duties (from which part of the offshore facilities are exempted). The foreign exchange component is estimated at US$417.0 million or 73%. Annex 10 gives details of the cost estimates which are summarized below. Annex 12 indicates the phasing of expenditures over the period 1977- 1981.  - 14 - SUMMARY OF PROJECT COSTS (Rs million) (US$ million) Local Foreign Total Local Foreign Total % Development drilling Wells 110.0 332.0 442.0 12.0 37.0 49.0 8.6 Well Platforms 80.0 250.0 330.0 9.0 28.0 37.0 6.5 Subtotal 190.0 582.0 772.0 21.0 65.0 86.0 15.1 Infrastructure Land 40.0 - 40.0 4.5 - 4.5 0.8 Pipelines 159.0 1,345.0 1,504.0 18.0 149.0 167.0 29.2 Processing Plat- forms 22.5 742.5 765.0 2.5 82.5 85.0 14.9 Uran Oil Terminal 153.0 4.5 157.5 17.0 .5 17.5 3.1 Gas Processing Plant 67.0 45.0 112.0 7.0 5.0 12.0 2.1 Oil Stabilization Plant 90.0 9.0 999.0 10.0 1.0 11.0 1.9 Nhava Sheva Supply Base 138.0 - 138.0 15.0 - 15.0 2.6 Telecom and Control 72.0 36.0 108.0 8.0 4.0 12.0 2.1 Custom Duty 108.0 - 108.0 12.0 - 12.0 2.1 Engineering; Technical Ser- vices and Project Supervision 80.0 250.0 330.0 9.0 28.0 37.0 6.5 Subtotal 929.5 2,432.0 3,361.5 103.0 270.0 373.0 65.3 Total Base Cost 1.119.5 3.014.0 4,133.5 124.0 335.0 459.0 80.4 Physical Contin- gencies (15.3%) 171.5 461.0 632.5 19.0 51.0 70.0 12.3 Price Contin- gencies (8.0%) 103.0 278.0 381.0 11.0 31.0 42.0 7.3 TOTAL 1,394.0 3,753.0 5,147.0 154.0 417.0 571.0 100.0  - 15 - Development drilling costs were derived from ONGC's historical costs and reflect conditions likely to prevail in the next two years. However, an overall physical contingency of 15% was applied to the cost of wells and well platforms to account for non-productive wells. The costs of infra- structure are based on PLT cost estimates and reflect conditions in early 1977. Physical contingencies of 57 and 25%, 1/ respectively, were applied on the cost of materials and construction for the main offshore facilities (pipelines and platforms). For the shore facilities and telecommunications system, which have not yet been designed in detail, an overall physical contingency of 20% was applied. Price contingencies amount to 8% of the project cost (including physical contingencies) and are based on an annual rate of escalation of 7% for material and equipment and of 9% for civil works. 4.15 The cost of consultants' services was estimated on the basis of actual contracts and of prevailing rates in India and abroad. 2/ Total manpower requirements are estimated to be 11,000 man-months of which about 70% will be foreign. The average cost per man-month is estimated at US$3,600 and US$1,800 for foreign and local consultants, respectively. G. Items Proposed for Bank Financing 4.16 The proposed Bank Loan of US$150.0 million would finance the for- eign exchange cost of the construction of the two subsea pipelines and the equipment and installation of the Bassein North and Bombay High North pro- cessing platforms, two well platforms and the gas processing plant. These contracts are suitable for international competitive bidding and are likely to attract a large number of suppliers and contractors. The proposed Bank loan would finance about 26% of the total cost, and about 36% of the foreign exchange cost of the project, including contingencies. 1/ The high physical contingencies reflect the difficulty of offshore construction which depends on unpredictable weather conditions. 2/ These costs do not include the cost of CFP's services which will extend beyond the scope of the proposed project and will not be limited to Bombay High.  - 16 - H. Financing Plan 4.17 ONGC's total financial requirements from FY78 to FY80 for Bombay High and Bassein North development expenditures, are currently estimated at Rs 8,438 million (US$937.6 million), of which Rs 5,147 million (US$571 mil- lion) is for the project and Rs 3,291 million (US$366.6 million) is for Phases IV and V. ONGC's financial projections show that Rs 3,486 million (US$387.3 million) will be financed from internal cash generation. The balance will be financed, in equal ratios, by equity contributions from the GOI and loans from the GOI and the Oil Industry Development Board, as indicated below: Summary Finance Plan, FY78-80 Rs million US$ million % Total requirements: of which The Project 5,147 571.0 61.0 Phases IV and V 3,291 366.6 39.0 Total 8,438 937.6 100.0 Financed by: internal cash generation 3,486 387.3 41.4 GOI equity /1 2,476 275.2 29.3 loans /2 2,476 275.1 29.3 Total 8,438 937.6 100.0 /1 Including an estimated US$50 million of bilateral aid (e.g., Japan, France, U.K., Germany). /2 Including the proceeds of the Bank loan (US$150 million) loans from OIDB (US$70.3 million), the GOI (US$4.8 mil- lion) and commercial banks (US$50 million). 4.18 The GOI has agreed that it would relend the proceeds of the Bank loan to ONGC at an interest rate of 10-1/4% per annum for a period not exceed- ing 20 years including three years of grace. The GOI has further agreed that it would provide sufficient funds to meet ONGC's financial requirements for the project and other investments. I. Project Execution, Supervision and Reporting Execution 4.19 The Offshore Operations and Construction Divisions will be respon- sible for project implementation and supervision with the assistance of out- side consultants (para. 4.w9-4.13) and of ONGC's advisory services. The  - 17 - Operations Division, which will supervise and coordinate development drilling, is qualified and sufficiently staffed to supervise drilling contractors. The staff of the Construction Division is competent and is currently being in- creased to meet the additional work load generated by the project. ONGC has already transferred experienced personnel from its onshore operations to the project staff and has appointed an offshore project manager who will also be responsible for the entire Construction Division. Experienced sub- project managers have been appointed for the pipelines, platforms and crude oil stabilization plant. The selection of subproject managers for telecom- munications and for the gas processing plant is underway. These arrangements are satisfactory. However, there is a need to improve the Construction Division's capability in project scheduling and in overall project management. ONGC has agreed to hire management consultants to assist in the establishment of adequate project management procedures and of an appropriate management information system prior to December 31, 1977. Construction Schedule 4.20 The project should be constructed over a period of two years with most of the offshore facilities being completed by mid-1978 (Annex 11 shows the proposed construction schedule). Because of the impossibility of under- taking any major construction offshore during the monsoon (June to October), ONGC has decided to complete the two subsea pipelines, the Bassein North platform, the critical facilities of the onshore terminal and the supply line by May 1978. The Bombay High North platform will be completed only at the end of 1978 or early in 1979. However, in order to ensure that the two pipelines can be used during the 1978 monsoon to transport oil and gas (the latter would continue to be flared otherwise), ONGC has decided that an interim platform will be installed at Bombay High by May 1978. This platform, will be built adjacent to the location of, and will be subsequently connected to, the Bombay High North platform. Although the construction schedule is tight, it is achievable and the fact that there is a temporary worldwide lull in offshore construction activity should help ONGC achieve its objectives. Supervision and Reporting 4.21 ONGC is competent to supervise the execution of the project with the assistance of management consultants (para. 4.19) and of the consultants referred to in paras 4.09 to 4.13. ONGC's internal reporting procedures will be improved under the provision of para. 6.08. ONGC has agreed to send copies of quarterly progress reports to the Bank.  - 18 - J. Procurement and Disbursement 4.22 International competitive bidding procedures, in accordance with Bank guidelines, will be followed for the Bank-financed items. No local suppliers or contractors are expected to bid on these terms; however, for the purpose of bid evaluation, a preference of 15% or the custom duty, whichever is less, will be applied to any local bid. Bid invitation and evaluation will be the responsibility of ONGC with assistance from consultants as required. ONGC's normal procurement procedure for foreign supplies requires worldwide bidding similar to the Bank's ICB. It is expected that this procedure will be applied for all imported equipment and services not financed by the proceeds of the Bank loan. ONGC has indicated that, in order to save time, it was their intention to call for lump sum bids for the Bassein North and Bombay High North platforms; since this procedure will not restrict competition, it is acceptable to the Bank. Bid invitations for critical items with limited availability, which are essential to efficient execution of the project and estimated to cost less than US$2 million, may be sent directly to the quali- fied available suppliers, provided that the Bank's prior approval is obtained for these items and the list of suppliers and that the aggregate amount procured under this procedure does not exceed US$7.5 million. 4.23 Disbursement will cover 100% of the foreign cost of Bank financed contracts. Disbursement of the Bank loan is expected to be completed in three years. (Annex 13 gives the estimated schedule of disbursement of the Bank loan.) The closing date of the proposed loan would be December 31, 1980. K. Right-of-Way and Land Acquisition 4.24 No right-of-way problem is expected offshore, since ONGC's proposed pipeline route does not cross any shipping channel. Onshore, ONGC is in the process of acquiring the land required for the Uran terminal and the supply base. Negotiations are at an advanced stage and no difficulties are expected. The onshore supply lines have to be routed so as to minimize right-of-way problems and negotiations with the Port Authority and other State Government agencies are progressing satisfactorily. Obtaining formal title may take time but is not expected to delay project execution. ONGC has agreed to take all actions necessary to acquire as and when needed the land and rights- of-way required for construction of the project facilities. L. Operations and Training 4.25 ONGC's staff is adequately trained to carry on its present off- shore operations, but operating and maintaining the new and more complex facilities of the Bombay High project will require additional operational and supervisory staff training. (See Annex 9 for a description of ONGC's operations and facilities.) ONGC's management recognizes the need for  - 19 - this training and has budgeted the equivalent of US$700,000 to fund a train- ing program. A detailed program is being formulated. It will comprise local and on-the-job training, training abroad at equipment manufacturers' plants and foreign installations, and various special training related to offshore operations, safety, pollution control and related subjects. As part of its program, ONGC plans to accept offers of offshore training by the British and Norwegian governments. These arrangements are satisfactory. M. Ecology and Safety 4.26 Pipelines properly protected, maintained and operated pose no serious environmental hazards. Accordingly, all necessary precautions will be taken during design and construction of the oil and gas pipelines to minimize the chances of overpressurization, corrosion and third-party damage. The offshore and terminal facilities will not cause noticeable atmospheric pollution, and effluents, essentially oily water and human waste, will be adequately treated before disposal. ONGC is procuring a vessel outfitted for offshore fire-fighting and oil spill clean-up. In addition the GOI is activating a National Coast Guard service, which will be assigned responsibility to assist in offshore oil emergencies. All manned platforms will be equipped for fire-fighting and will be provided with proper emergency escape and survival systems (Annex 14). In addition, ONGC plans to adopt the North Sea safety regulations during construction, and has commissioned an in depth study of the environmental and safety aspects of the project. The study will be financed by UNDP. N. Project Risks 4.27 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, ONGC's con- sultants have considerable experience in the design and construction of offshore and onshore facilities, and experienced contractors will be selected for project implementation. ONGC's staff is qualified and experienced in all the facets of oil and gas production, processing and utilization and, there- fore, 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 offshore during the monsoon. 4.28 9'ere is a risk that the fields will not live up to ONGC's expecta- tions. 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  - 20 - has used experienced consultants to assess both the reserves and the produc- tion mechanisms. All estimates are consistent and show that the fields should eventually produce more than was anticipated originally. During the early years of production, ONGC staff and CFP will monitor the behavior of the reservoirs and provide sufficiently advanced warning of any problems for ONGC to take remedial actions. 0. Further Expansion of the Bombay High Area 4.29 The two main structures, Bombay High and Bassein North, are under intensive development. Another structure, Bassein South, has been identified, and is a gas field. Other structures at the periphery of BH are still under exploration; several wells have been drilled which have indicated the pres- ence of hydrocarbons but not of commercial quantity. There are several un- explored structures in the area which, on the basis of seismic data, appear to be as promising as the two Bassein fields. It is likely that the total oil and gas recovery from this area will exceed what is currently planned for BH and BN. For this reason the pipeline and platforms have been designed for a higher ultimate capacity so as to avoid costly capacity expansion if more oil and/or gas is discovered. This is standard practice in offshore development, and the impact on the project cost is minimal as the costs of the pipeline and of the platforms are not very sensitive to size. 4.30 The Bassein South field will not be developed in the near future since there is no immediate outlet for the gas. Several alternatives are being considered for the future utilization of this gas, the most likely being to use the gas in the Trombay area or in Gujarat. V. JUSTIFICATION- A. General 5.01 The discovery and development of Bombay High and Bassein represents a significant step towards India's self-sufficiency in petroleum. Until recently, it was expected that the share of onshore production in total petroleum requirements would decrease in relative terms, although production would continue to increase at about 4% per annum. The development of offshore fields will reverse this trend and total domestic production from onshore and offshore fields is now expected to reach about 50% and 36% of total internal requirements in 1985 and 1990, respectively, thus saving India about US$16.0 billion over the next 20 years.  - 21 - B. Sector Objectives 5.02 ONGC is, and will continue to be, the main oil exploration and development agency in India, either on its own, as in the case of Bombay High, or in association with foreign oil companies which are currently operating under production-sharing contracts. In spite of its lack of experience offshore, ONG has managed the development of a giant field 1/ very efficiently . The Commission has used outside consultants and contrac- tors to assist their staff in the design of the program and in the construc- tion of the first stage, while training their staff in offshore development techniques. Faced with the single largest development program in the history of India's oil and gas sector, the Government has taken steps to make foreign exchange available in time and to eliminate bureaucratic procedures, which might have delayed the program. India's offshore potential remains, how- ever, largely unexplored, and Bombay High is only the first step in a long process which could eventually lead to self-sufficiency in oil. It is currently estimated that about US$1.5 to 2 billion would have to be invested, in exploration alone, over the next 10 years to fully evaluate India's poten- tial. Part of the resources required may be provided by foreign oil companies under production-sharing contracts. However, the GOI and ONGC will have to allocate a substantial part of the income generated by Bombay High to finance their own share of exploration and to develop any new resources that may be discovered, if the current offshore momentum is to be maintained in the future. 5.03 For the first time, the Bank has been directly involved in the oil and gas sector. Its initial involvement, in the preparation of terms of reference for the utilization of natural gas, was extended to the preparation of terms of reference for the initial feasibility studies of Phase III of the development program and the review of consultants' proposals. During the preparation of the Project, the GOI, ONGC and the Bank have identified and discussed a number of institutional issues which have been or are in the process of being resolved satisfactorily, i.e., long-term planning and budget- ing (paras. 6.06 and 6.07), ONGC's management information system (para. 6.08) and the need for external consultants in project management (para. 4.19) and reservoir engineering (para. 4.03). But these are only the first steps in the strengthening of ONGC's managerial and operational capabilities, which is required to manage the much larger and complex exploration and development program that lies ahead. The role of the Bank should therefore be viewed in a somewhat broader perspective, which is to assist ONGC in building up an organization which will help India become self-sufficient in petroleum in the 1/ By industry standards, a giant field is a field that would yield more than 500 million barrels (about 70 million tons) of recoverable oil reserves.  - 22 - minimum possible time at least cost. One of the areas in which the Bank has been and will continue to be of immediate assistance is in providing advice on how the methods used by oil companies to evaluate the feasibility of oil development projects (para. 5.05) can be used in ONGC's context. C. Justification of the Bombay High Offshore Development Program 5.05 Oil companies have developed financial analysis procedures to assist management in deciding which projects should be developed and in which order, and how limited capital funds can be allocated in the most efficient way. To do this two levels of analysis are required. First, each project must yield a discounted cash flow (DCF) rate of return and payout time which satisfy the profitability and cash flow objectives of the enterprise. Second, since there are several ways in which a field can be produced, the rate of re- turn on incremental capital outlays for different alternatives must be eval- uated. While these procedures were originally developed for private oil companies, they also apply to national oil companies such as ONGC. 5.06 The evaluation of the Bombay High Offshore Development Program (BHDP), including Phases Ito V, has been carried out on the basis of the production schedule-derived from the De Golyer and MacNaughton studies (para. 4.02) and under two different price assumptions (US$13 per barrel, which is the present international price and US$5 per barrel which is the price set by the GOI for offshore crude oil). The results of the analysis are in Annex 22 and are summarized below. The purpose of this evaluation is to determine the impact of the entire program, as opposed to the Project, on the economy of India (US$13/barrel, excluding income tax) and on ONGC's current and future financial viability (US$5/barrel, including income tax). t  - 23 - Summary Evaluation of the Bombay High Offshore Development Program US$13/barrel US$5/barrel excluding income tax including income tax DCF return (%) 66.2 19.8 Maximum negative Cash Flow (Rs million) 3,238 6,129 Pay out time from April 1, 1977 (years) 1.7 4.8 Net Present Value (Rs million) at discount rates of: - 10% 60,138 - 20% 30,258 - 40% 9,720 5.07 At US$13/barrel, excluding income tax, the development of Bombay High and North Bassein would yield a DCF return of 66.2%. The Net Present Value (NPV) of the savings generated by the Program at the opportunity cost of capital (estimated at 10%) would be Rs 60,138 million (US$6,682 million) over the life of the fields, reflecting a discounted production cost per barrel of about US$3.15 per barrel. 5.08 At US$5/barrel, the Program would yield a DCF return after taxes of 19.8% to ONGC. This return is comparable to what international oil com- panies normally require for their domestic operations and is considered satisfactory. The following table summarizes the breakdown of the cost of oil per barrel calculated on the basis of annual depreciation: Breakdown of the cost of oil per barrel US$/barrel % Exploration .33 5.5 Production Cost /1 1.76 29.5 Taxes 2.24 37.5 Net profit 1.64 27.5 Total 5.97 100.0 of which income derived from natural gas and LPG .97 /1 Includes operating cost, depreciation and financial charges.  - 24 - This shows that the current price of US$5/per barrel to ONGC is adequate to cover production and exploration costs, and generate a reasonable profit after tax. Each discovery should, however, be considered as a separate project and it would therefore be appropriate for the GOI to reconsider the price paid to ONGC for oil and natural gas so that, within the limits set by international prices, prices are set at a level which would permit an effi- ciently operated ONGC to earn an acceptable DCF return and to finance a reasonable portion of its exploration and development. Since ONGC's market for crude oil and natural gas is a captive market and since ONGC does not incur any political risk in its domestic operations, a DCF rate of return of 15% over the life of the project would be considered satisfactory. D. Economic Justification Market 5.09 The production of Bombay High and Bassein North will consist of crude oil and associated gas. After treatment, the latter will yield lean gas, consisting mainly of methane and liquefied petroleum gas (LPG) consisting of butane, propane and heavier fractions. The estimated production schedule for these products is given in Annex 24. The three products -- crude oil, associated gas and LPG -- have different markets which have been investigated separately. Bombay High and North Bassein crude oil will be substituted for imports, lean gas will be used as feedstock in the fertilizer industry and LPG will be used initially in the residential and commercial sector. The cost of the facilities required to utilize these products is estimated at US$32.3 million of which US$10 million would be required to carry out minor modifications to existing refineries, US$18 million would be required for the conversion of the Trombay fertilizer plant and US$4.3 million for LPG storage and distribution facilities (Annex 24). Cost/Benefit Analysis 5.10 Several production schedules for the Bombay High Field, involving different drilling and investment programs, were investigated by De Golyer and MacNaughton in their studies. Two cases were selected on technical grounds and a cost/benefit analysis was carried out to compare their eco- nomic merits. Details of the analysis are given in Annex 23 and summarized below.  - 25 - Summary Evaluation of Bombay High Development Program Case I Case II Life of the field (years) 31.0 31.0 Total oil recovered (million tons) 170.0 158.0 % of oil in place 21.0 19.5 Peak production (000 barrels per day) 225.0 280.0 Duration of plateau production (years) 8.0 2.0 Rate of return (%) 93.2 91.4 Net present value /1 (US million) at discount rates of: 10% 4,787 4,585 20% 2,527 2,456 40% 866 845 /L Over 15 years. ONGC current development plans are based on the first case which maximize oil recovery and avoid the construction of peak facilities which would be used for a short period of time. 5.11 Annex 23 provides the assumptions used in the economic evaluation of the development program. On the basis of present international prices for crude oil (US$13/barrel) and-of the prices at which ONGC will sell natural gas and LPG (US$55,000 m and US$90/T) the program would yield an economic return of 165% if sunk costs are excluded. If sunk costs are in- cluded the economic return would be 66%. Since sunk costs are essentially exploration and early development drilling expenditures, the latter pro- vides a better appreciation of the economic feasibility of the entire pro- gram. The economic return is not very sensitive to variations in the pro- gram costs; an increase in the program cost of 20% would bring the economic  - 26 - return to 56%. It is more sensitive to delays in production; a delay of one year in the production schedule would bring the return to about 50%, which, however, would still be satisfactory. No attempt has been made to calculate an incremental return for the project since the facilities included in Phase III cannot be dissociated from those already constructed under Phases I and II and those planned for Phases IV and V. VI. THE OIL AND NATURAL GAS COMMISSION A. General 6.01 The Oil and Natural Gas Commission is a Government owned statutory body created in 1959 by an Act of Parliament to "plan, promote and imple- ment the development of petroleum resources and the production and sale of petroleum products produced by it." ONGC's statutes provide that it is a corporate body with power to acquire, hold and dispose of property and to contract. ONGC has authority to borrow. The Commission consists of a Chairman, and not less than two and no more than eight Members appointed by the Government for a period of five years. 6.02 At present, the Commission consists of the Chairman, four full-time Members (Finance, Materials, Production and Exploration) and of two part-time Members representing the Ministry of Finance and the Ministry of Petroleum. All decisions of the Commission must be approved by the majority of the mem- bers. ONGC owns Hydrocarbons India Ltd., a subsidiary which is in charge of the Commission's ventures abroad (Iran, Iraq and Tanzania). B. Organization and Management 6.03 The Commission acts very much as a Board of Directors and is responsible for setting ONGC's policies. Its development plan has to be approved by the Planning Commission and its annual budget for current and capital expenditures has to be approved by the Ministry of Petroleum and the Ministry of Finance before it is sanctioned by Parliament. Over time, the Commission, which was originally part of the Geological Survey of India, has evolved into a full fledged oil company which is still governed by the financial practices of an advisory commission. However, since the discov- ery of Bombay High, the GOI and the Commission have taken actions to ensure that these practices would not be an obstacle to efficient project implemen- tation. Recent decisions regarding the approval of ONGC's expenditures and the financing of the Bombay High Offshore Development Program reflect their intention to introduce more adequate practices into ONGC's financial management (paras 6.07 and 7.07).  - 27 - 6.04 The administrative and financial functions (planning, procurement and stores, accounting, personnel, computer activities, etc.) are centralized in the corporate headquarters at Dehra Dun, along with the main research and development and training facilities. Operational staff is divided among three Regional Offices (Central, Western and Eastern Regions) and the Bombay High Development Project (BHDP), whose headquarters are in Bombay. Prior to 1974 most of the operational decisions were taken centrally from Dehra Dun and the Regional Managers had little, if any, authority. Over the past three years the decision-making process has been decentralized to the regions, which now have operational responsibility and the authority to commit funds within their approved budget. As of January 1977 ONGC's total staff was 23,000 of which 1,500 were engineers and technicians. Annex 15 shows ONGC's current organiza- tion. ONGC's onshore staff is large compared to its current production. Man- agement is conscious of this fact and is implementing a policy whereby only key personnel are replaced. 6.05 BHDP was created in FY74 to deal with exploration and development in the Bombay High area. Over the past three years, its staff grew from 20 to 600, and consists mostly of engineers and technicians. Because of the size of the Bombay High Development Program, its economic importance to India and the need for rapid decisions, ONGC's senior management and, more particularly, the Chairman, the Member (Finance) and the Member (Offshore) have been directly involved in BHDP management. At present, most of the decisions concerning the Program are referred directly to the Chairman. While this procedure has had the advantage of speeding up decisions in the early stages of the program, it is not adequate for the purpose of the project, which will require that a large number of decisions be taken at the field level. ONGC's senior manage- ment is conscious of this problem and has decided to appoint a managing direc- tor for the offshore development program. This manager will be assisted by two directors (finance and material) and would be responsible for the imple- mentation of the program, while ONGC's headquarters would be responsible for long term financial planning and overall offshore development policies. In addition ONGC has already taken steps to improve its planning, budgeting and reporting procedures (paras. 6.06 to 6.08) and to train additional staff (para. 4.25). Planning and Budgeting 6.06 ONGC's current five-year plan covers the period FY75-FY79, and coincides with India's Five-Year Plan. The original targets of the Com- mission's plan have been revised several times to take into account the development of Bombay High and North Bassein. These modifications have been done piecemeal and do not fully integrate the financial, technical and eco- nomic implications of the Program. The dynamic nature of the oil industry, in which a new discovery may justify a complete reassessment of priorities, calls for a flexible planning framework in which the relative merits of potential projects can be continuously evaluated. The Ccmmission is conscious of this and has created a Perspective Planning Section in Dehra Dun to review its current five-year plan and more generally be responsible for long-term plan- ning. The main functions of this section are to analyze the data produced  - 28 - by ONGC's technical and financial departments and to continuously update ONGC's five-year plan in the light of new developments. It is the Commis- sion's intention to periodically review the staffing of this section and to introduce more sophisticated project evaluation techniques. 6.07 In October of each year, the Commission submits separate budgets for its onshore and offshore operations for approval by the Government. Each budget includes ONGC's projected capital and current expenditures for the fol- lowing fiscal year and revised estimates for the current year. If ONGC's re- sources are not sufficient to cover its future financial requirements, the annual budget also includes a request for support from the Central Budget which has to be approved by Parliament. Central Budget resources are nor- mally allocated either as GOI contribution to equity (exploration expendi- tures) or as loans (development expenditures). Within the approved budget the Commission has to obtain Government approval for the implementation of any scheme which involves a capital expenditure in excess of Rs. 50 million (US$5.6 million). To expedite procurement decisions, the GOI has created a Committee consisting of two representatives of the Ministry of Petroleum, a representative of the Ministry of Finance and of three Members of the Com- mission (Finance, Materials and Offshore) for the approval of expenditures under Phase III of the development program. Since Phase III has been approved by the Government, this Committee can decide on the expenditure sanction on the basis of bid evaluation without requiring any further proj- ect justification. Performance Monitoring 6.08 The Commission's management information system is weak, due partly to the dispersion of onshore activities and to communication problems with headquarters and partly to the lack of adequate reporting procedures. During negotiations, ONGC agreed to establish an adequate management information system prior to December 31, 1977, with the assistance of the management consultants referred to in para. 4.19. C. Operations 6.09 The Commission is primarily involved in exploration, develop- ment, transportation and treatment of hydrocarbons. It is not currently involved in down-stream activities (refining, processing, utilization and distribution). As a result of the project the Commission's operations will be widened offshore but are not expected to undergo any substantial change in scope.  - 29 - D. Insurance 6.10 ONGC has adequate insurance coverage with several insurance com- panies in India which are re-insured in the International Market (Annex 17). Insurance of offshore equipment follows the international practice, whereby designs are certified by independent agencies. ONGC's insurance coverage is satisfactory. E. Finances 6.11 ONGC's accounting system provides for a segregation of project activities. The Commission's financial organization is adequate and account- ing practices are effective. However current procedures and formats are still manually compiled and could be improved by better use of ONGC's existing computing facilities. This will be reviewed in the formulation of the Manage- ment Information System (para. 6.08). ONGC's main source of revenue is its sales of crude oil and natural gas to domestic refineries and industries at a price fixed by the Government. The Commission pays royalties to the State in which it operates and pays income tax to the Government at a rate of 57.75%. According to the statutes, ONGC should pay dividends to the Government, but is exempted from doing so when it declares a loss or borrows from the OIDB and/or the GOI. So far ONGC has not declared any dividend payment. Over the past three years the Commission has made an operational surplus but has had to borrow from OIDB and the GOI to finance an increasing part of its offshore development program (para. 7.04). Current financial projections show that this situation will continue in the future. F. Audit 6.12 Each project unit has a Finance and Accounts Section reporting to the Project Manager and to the Member (Finance) at ONGC's headquarters. Internal audit is satisfactory. ONGC's accounts are audited by the Comptroller and Auditor General which is acceptable to the Bank. While ONGC's accounts are generally available, at the latest, four months after the close of the accounting exercise, ONGCGs rules and regulations provide that audited accounts cannot be made public before they have been approved by Parliament. ONGC has agreed that the Commission's audited accounts will be submitted to the Bank not later than twelve months after the end of the fiscal year. Provisional accounts will be available for review by Bank supervision missions not later than four months after the end of the fiscal year.  - 30 - G. Prices 6.13 Crude oil and natural gas prices are controlled by the GOI. Crude oil and natural gas prices are revised every three years upon the recommenda- tions of the Oil Pricing Committee. Until i373/74 prices to producers of domestic crude oil were based on import parity. After the increase in world prices, the GOI decided to abandon this principle and to set crude oil prices at a much lower level than international prices. The current price for domestic crude oil produced onshore is US$3.58 per barrel (i.e. 27.5% of the international price). On the basis of this price, ONGC's operating surplus was Rs. 520 million in FY75 and Rs. 240 million in FY76. 6.14 The prices of offshore crude oil and natural gas have been set at US$5/barrel and US$551000 m , respectively. These prices have been deter- mined on the basis of ONGC's anticipated cash flow for the development of Bombay High and are considered adequate to ensure the financial viability of the project (para. 5.08). VII. FINANCIAL ASPECTS A. Introduction 7.01 Prior to the development of Bombay High, ONGC's operations were limited to the production of onshore fields in Assam and Gujarat. The pros- pects arising out of India's first offshore discovery, and possible subse- quent ones, open up a new era for ONGC. Crude oil production will almost triple in the next five years and operations will be on a much larger scale, particularly offshore, thus requiring much larger capital expenditures result- ing in increased cash flows. It is therefore, in the light of ONGC's future development, rather than its past performance, that one should analyze its financial situation. ONGC, which was originally set up as an advisory body, has begun an evolutionary process which should turn it into a large national oil company. The Government, while retaining all the necessary controls over ONGC's investment programs and development policies (para. 6.03), has in prac- tice created a framework in which ONGC can operate in a financially responsi- ble and reasonably autonomous way. The Government has set prices of crude oil and natural gas to ONGC at a level which enables the Commission to meet its operational requirements, service its debt and self-finance a reasonable share of its development. In addition, the Government has provided funds to meet ONGC's requirements which could not be met from internal cash gene- ration; in this respect, exploration expenditures have been financed by equity and development expenditures from loans. These policies are sound and the GOI has indicated that they will be continued in the future. ONGC management will be more involved in the making of the financial policy of the enterprise, and its financial performance, as reflected in its accounts, can be compared with that of other oil companies.  - 31 - B. Present Financial Position 7.02 Income Statements, Balance Sheets, and Sources and Applications of Funds Statements for ONGC's overall operations (onshore and offshore) for the period FY74 through FY82 are given in Annexes 19 to 21. A sum- mary of ONGC's estimated financial position as of March 31, 1977 is given below: Rs US$ _ ---- millions---- Net Fixed Assets 3,208 356 62 Work in Progress 948 106 18 Investments 471 52 9 Current Assets 1,322 Less: Current Liabilities 780 542 60 11 Total Net Assets 5,169 574 100 Represented by Equity 3,432 381 66 Long-term debt 1,737 193 34 7.03 As of March 31, 1977, ONGC had a satisfactory financial position. Investments of US$52 million represent ONGC's contribution to Hydrocarbon India Ltd., its subsidiary (para 6.02). ONGC's debt/equity ratio of 34/66 was satisfactory and left a margin for further borrowing. ONGC's long-term debt relates to loans from GOI and the Oil Industry Development Board; the latter derives its funds from an excise tax of Rs 60 (US$7) per metric ton of crude oil. Loans from 0IDB to ONGC have generally been made at 4.5% per year for 15 years with a two year grace period; GOI loans are currently made at 10-1/4% per year for 10 years including 4 years of grace. 7.04 Operating results for recent years relate mainly to onshore oper- ations since the development of Bombay High has only been in its initial drilling stage and production from the project has been minimal. ONGC has derived all its revenues from the production and sale of crude oil and natural gas. From FY74 to FY77 crude oil production increased from 4 Mmt to 5.7 Mmt at a rate of 12.5% p.a. This and the 1974 increase in the price of on-shore crude oil from US$1.48/barrel to US$3.58/barrel have enabled ONGC to increase its revenues from Rs 816 million (US$90.6 million) in FY74 to an estimated  - 32 - Rs 1,450 million (US$161 million) in FY77. However, owing to several changes in depreciation and depletion accounting policy, ONGC's net income has been erratic, with rates of return on invested capital varying between 2% and 28% (para 7.05). During the four year period ONGC's cash generation has been satisfactory; ONGC was able to finance about 49% of its capital investment requirements, including those of Bombay High, after meeting debt service and additional working capital; 29% has been financed by loans (GOI and OIDB) and 22% from GOI equity contributions. 7.05 Until recently, ONGC's depreciation policy provided for all devel- opment drilling expenditures to be charged against income in the year they occur. The purpose was to increase operating expenses and thereby reduce ONGC's tax liability and increase internal cash generation. However, this practice introduced wide variations in ONGC's operating income and rate of return which make historical analysis and inter-industry comparisons diffi- cult. This practice has now been discontinued and while ONGC will still use high depreciation rates for tax purposes, they have introduced deprecia- tion rates related to the economic-life of the assets for the purpose of financial reporting. These arrangements are satisfactory. ONGC have indi- cated that they intend to introduce replacement accounting procedures on a trial basis when the offshore operation is firmly established. C. Financing Plan 7.06 ONGC's overall capital investment requirements for the period FY78 through FY82, along with the sources from which they would be met, are summarized below; detailed Sources and Applications of Funds Statements are given in Annex 21.  - 33 - Rs US$ % ------millions---- Requirements Exploration and Development Program Onshore - Exploration 1,814 201 Development 3,632 5,446 403 604 35 Offshore - Exploration 1,918 213 Development 7,902 9,820 878 1,091 64 Other 60 7 1 Total Requirements 15,326 1,702 100 Sources Internal Cash Generation 10,937 1,215 Less: Debt Service 3,173 352 Working Capital 270 7,494 30 833 49 Other Sources Borrowings 4,363 485 28 Equity 3,469 384 23 15,326 1,702 100 7.07 Over the period FY78 through FY82 ONGC's capital investment is estimated at US$1.7 billion of which US$1.0 billion would be foreign exchange. The financing plan is based on the Government decisions made in May 1977 re- garding the implementation of Phase III. It assumes that the GOI will finance a share of the exploration program from equity, as it has done in the past. After taking into account ONGC's internal cash generation, the remaining gap of Rs 7,832 million (US$869 million) will be met by equity and borrowings in about equal ratios. In addition to the proceeds of the Bank loan which will be relent to ONGC, it is expected that the GOI will mobilize about US$50 million from bilateral aid (Japan, France, U.K., Germany) and will raise a loan of about US$50 million from commercial banks.  - 34 - D. Future Finances 7.08 Forecast Income Statements and Balance Sheets for FY78 through FY82 are given in Annexes 19 and 20 with explanatory notes in Annex 18. On the basis of present prices (paras. 6.13 and 6.14), net income after taxes is expected to grow at a satisfactory rate; annual rates of return on average invested capital (after income tax) are expected to average about 12% - after completion of the project - and ONGC would be able to provide about 57% of its required capital investment from internal cash generation. The debt/equity ratio would leave an adequate margin for further borrowing; annual debt service coverage would be satisfactory. Salient features from the fore- cast financial statements are as follows: Years ending March 31 FY78 FY79 FY80 FY81 FY82 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 - % /1 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 /1 Defined as the ratio of net income before interest and after taxes (ex- cluding subsidiary) to the average, long-term debt and equity, includ- ing retained earnings but excluding work in progress and investment in subsidiary. These forecasts are based on ONGC's production estimates. They do not take into account any further discovery onshore and offshore or any increase in the price of crude oil to reflect inflation and/or changes in international prices. 7.09 These projections show that ONGC's performance will be satisfac- tory in the future, and that the policies followed by the GOI towards the financing of the project are sound and will enable ONGC to remain finan- cially viable. In this context the producer price set by the GOI for crude oil and natural gas will be the main parameter affecting ONGC's profitability and cash flow objectives, for the project and subsequent major developments.  - 35 - The GOI has agreed that it will from time to time carry out a review of the prices of crude oil and natural gas to ONGC, which will determine the level of price required to enable ONGC 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. ONGC has agreed that it will prepare and furnish each year to the GOI an economic and financial evaluation of the project and of any subsequent major development, which will indicate the level of price which would be required for ONGC to earn a DCF return of at least 15%, for the project and any subsequent major development. In the light of ONGC's past and projected performance, it is understood that ONGC's financial viability should be reflected in a capability to finance about 30 to 50% of the cost of new development projects from internally generated funds, in rates of return on invested capital of 10% to 14% and in an annual debt service coverage of 2 to 2.5 times. It is expected that prices which would ensure a DCF return of 15% after taxes to ONGC, for the project and subsequent developments, would bring about at least such results. VIII. RECOMMENDATIONS 8.01 During negotiations the following issues were raised with ONGC and satisfactory assurances were obtained: (a) ONGC would 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 (para 4.03); (b) ONGC will employ qualified and experienced consultants for the design and supervision of construction of the project (para 4.13), and ONGC will employ qualified management consultants (para 4.19); (c) ONGC would submit to the Bank copies of quarterly progress reports in a format acceptable to the Bank (para 4.21); (d) ONGC would establish a satisfactory management information system for the Bombay High Development Project by December 31, 1977 (para 6.08); (e) ONGC would submit audited accounts to the Bank not later than twelve months after the end of each fiscal year (para 6.12); (f) ONGC would prepare and furnish each year to the GOI an eco- nomic and financial evaluation of the project and of any sub- sequent development, which will indicate the level of price which would be required for ONGC to earn a DCF return of at least 15%, for the project and any subsequent major development (para 7.09).  - 36 - 8.02 Assurances were obtained from GOI during negotiations that: (a) GOI would cover ONGC's financing requirements including working capital (para 4.18); and (b) GOI would carry out from time to time a review of the prices of crude oil and natural gas to ONGC, which will determine on the level of price required for ONGC to continue to be financially viable (para 7.09). 8.03 With the above assurances and agreements, the Project would be suitable for a loan of US$150 million to GOI for a term of 20 years includ- ing three years of grace.  ANNEX 1 INDIA BOMBAY HIGH OFFSHORE DEVELOPMENT PROJECT BANK GROUP PROJECTS IN THE ENhGY SECTOR Amount Date of Loan/Credit (net of cancellation) Agreement Number Description (US$ million) April 18, 1950 Ln. 23-IN Bokaro-Konar Power (DVC I) 16.7 Jan. 23, 1973 Ln. 72-IN Damodar Power (DVC II) 10.5 Nov. 19, 1954 Ln. 106-IN Trombay Power 13.8 May 28, 1957 Ln. 164-IN Trombay Extension 9.7 July 22, 1958 Ln. 203-IN Third DVC Power 22.0 April 7, 1959 Ln. 223-IN Koyna Power 18.7 Aug. 8, 1961 Ln. 292-IN Private Sector Coal Production 28.8 Dec. 22, 1961 Ln. 307-IN Indian Iron and Steel Co. 18.6 (coal mining) Feb. 13, 1962 Cr. 19-IN Fourth DVC Power 16.5 Aug. 7, 1962 Cr. 24-IN Second Koyna Power 17.5 May 23, 1963 Cr. 37-IN Kothagudem Power 20.0 June 8, 1965 Ln. 416-IN Power Transmission 50.0 June 8, 1965 Ln. 417-IN Second Kothagudem Power 1I.0 June 28, 1966 Cr. 89-IN Beas Equipment 22.7 April 28, 1971 Cr. 242-IN Second Power Transmission 75.0 March 27, 1973 Cr. 377-IN Third Power Transmission 85.o July 8, 1975 Cr. 572-IN Rural Electrification 57.0 Jan. 13, 1976 Cr. 604-IN Fourth Power Transmission 150.0 April 1, 1977 Cr. 685-IN Singrauli Thermal Power 150.0 796.5 June 1977  ANNEX 2 INDIA BOMBAY HIGH OFFSHORE DEVELOPMENT PROJECT Glossary of Technical Terms 1. Development drilling. Extension of a drilling program once a strike has been established and proved to be capable of economic production. 2. Deviated well. A well drilled at an oblique angle. A deviated well starts vertically and is deflected gradually to enter the producing horizon at a calculated distance away from the main vertical well. 3. Directional drilling. A technique adopted to exploit as much of an oil and/or gas field from a single platform by drilling deviated wells. 4. Associated gas. Gas combined with oil. It provides the drive mechan- ism needed to force oil to the surface through a well. On reaching the surface, water is removed and the gas is split into wet and dry components to be transported separately. 5. Dry gas (lean gas). Gas containing a high proportion of methane and ethane. 6. Dry hole. A well which is not expected to produce hydrocarbons in commercial quantities. 7. Exploration. All operations preceeding commercial exploitation. (Surveys, exploratory and delineation drilling). 8. Delineation well. An exploration well drilled to appraise the value of an oil and/or gas discovery. 9. Gas reinjection. A secondary recovery technique of recyling surplus gas to maintain reservoir pressure. 10. Gas separation. Process of removing dissolved gas from oil. 11. Gathering lines. The flowlines in a subsea production system which gather oil from individual wells. 12. Lay Barge. A barge developed to lay subsea pipelines. 13. Liquefied petroleum gas (LPG). Gas consisting mainly of Butane and Propane.  INDIA BOMBAY HIGH OFFSHORE DEVELOPMENT PROJECT PAST COMERCIAL ENERGY PRODUCTION AND CONSUMPTION - ~~~~(000 ~Toe)7 Average rate of J. PRODUCTION 1965 1270 1271 1972 1973 1974 1975 growth p.a. (%) Coal and lignite a 35,750 39,400 38,440 40,350 41,230 44,700 50,410 3,49 Crude oil 4nd natural gas liquids 3,020 6,810 7,185 7,370 7,200 7,490 8,250 10.57 Natural gasJ2 660 1,280 1,355 1,405 1,505 1,725 2,080 12.16 Hydro and nuclear power ai 5,000 10,000 11 200 10 900 11 600 11 200 13.300 10.27 Total 4443 77,490 5,8 6025 61,35 65 74,040 5.23 + 8,ports 1 8,890 12,495 14,61o 15,695 17,120 18,445 19,995 8.44 I Exports (950) (970) (460) (300) (525) (440) (240) (12.88) - Bunker (565) (600) (635) (525) (575) (610) (575) - II. TOTAL APPARENT CONSUMPTION 51,805 68,415 71,695 74,895 77,555 82,[10 93,220 6.05 of which % Solid fuels 69.0 57.6 53.6 53.9 53.2 54.2 54.1 Liquid fuels 20.0 25.9 28.9 29.6 29.9 30.1 29.4 Gas 1.3 1.9 1.9 1.9 1.9 2.1 2.2 Electricity 9.7 14.6 15.6 14.6 15.0 13.6 14.3 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 III. IMPORT DEPENDEN(C Lk(%) 14.3 16.0 18.9 20.0 20.7 21.1 20.5 3.74 June 1977 Sources G World Energy SuppL es Ministry of Petrolet Indian Petroleum and Petrochemical Statistics J3 Computed on the basi.f of 1,000 kwh equivalent to 0.4 Toe Ratio of net import t i.otal apparent consumption  ANNEX 4 BOMBAY HIGH OFFSHORE DEVELOPNENT PROJECT ENERGY DEMAND PROJECTIONS (000 Toe) 19B3/84 1990/91 2000/01 Case a Case b Case a Case b Case a Case b Coa l 105,800 115,800 178,400 193,200 315,700 342,100 Oil /2 50,750 41,350 82,350 60,400 154,150 103,100 Natural Gas /3 n.a n.a n.a n.a n.a n.a Hydel 4 16,650 16,650 25,800 25,800 42,900 42,900 Nuclear /5 3,800 3&800 15,900 15 900 40 000 4GW00 Total 177,000 177,600 302,450 295,300 5572750 528,100 Average 177,300 299,375 540,425 Distribution % Solid Fuels 59.7 65.2 59.0 65.4 57.1 64.8 Liquid Fuels 28.7 23.2 27.1 20.5 27.9 19.5 z ectricity 11.5 11.6 13.8 14.1 15.0 15.7 Total 100.0 100.0 100.0 100.0 100.0 100.0 Case a: assumes that current oil prices will continue to increase, and that limited fuel substitution wll take place. Case b: assumes a decrease of oil prices in relative terms and prcmotion of substitution of coal for oil. Source: Report of the Fuel Policy Committee 1974. Second India Studies - Energy (K. Parikh, 1976). Mission's estimate. /L Include minor quantities for export. /2 include non-energy consumption and refinery losses. /3 not available: most of the natural gas will be used as fertilizer feedstock. / Based on specific consumption of 0.32-0.3-0.26 Toe per kwh in 1983, 1990 and 2000 respectively, and an average load factor of 30%. /5 Same assumption as above for specific consumptions, load factor of 70%. June 1977  ANNEX 5 Page 1 of 7 INDIA BOMBAY HIGH OFFSHORE DEVELOPMENT PROJECT Development of Energy Resources of India 1/ 1. The energy resources of a country are not immutably or precisely given. They can be assessed only at a particular time in relation to what is known or believed about how they can be developed and put to use and about the expected cost and benefits that will result from their exploitation. 2. In the present state of knowledge, India's energy resources can be divided into three main headings: commercial energy which would include coal, hydrocarbons (oil and natural gas), hydro-power and nuclear fuels; non- commercial energy which consists mainly of forest resources and animal and vegetable wastes; and prospective energy resources including solar energy, geothermal and tidal energy and wind power for which no commercial technology is yet available in India or elsewhere.. A. Commercial Energy (i) Coal 3. Recent estimates by the Geological Survey of India indicate that total reserves (proved and others) could be as high as 83,000 million metric tons (Mmt) equivalent to about 23,000 million tons of oil equivalent (MToe) of which about 25% would be coking coal of various quality and 75% non-coking and lignite (Table 1). Various studies have estimated that the reserves of coking and non-coking coal could satisfy the projected coal demand of the steel industry for about 40-50 years and of other sectors for about 50-75 years under current assumptions of economic growth. 4. Coal basins in India are geographically concentrated within the area located in the eastern and north-eastern part of the country. The four major fields (Ramiganj, Tharia, North Karanpura and Singrauli) account for more than 60% of the total production of coking and non-coking coal. There are no significant coal fields in the north-western, western and southern region. Therefore long haulages are necessary if coal is to be supplied to these regions. Over the past 20 years a deliberate attempt has been made, with some success, to develop coal production in other areas to reduce transport costs. Most of the coal mined in India has a high ash content. 1/ In this annex we have relied on information supplied by P.D. Henderson in his book: India: the Energy Sector and on study of the energy sec- tor by Kirit Parikh of the Ford Foundation in India.  ANNEX 5 Page 2 of 7 As better quality coal was mined and had to be replaced by lower grade, the average ash content of Indian coal has increased from about 14% to over 20%. 5. After eight years of semi-stagnation up to 1973/74, coal production increased by 13.7% in 1974/75 from 78.2 to 88.9 Mmt. This momentum was main- tained in 1975/76, the first six months showing an increase of 11.5% over the same period in the previous year and it now appears that the target of 135 Mmt production for the current five-year plan could be achieved. Most of the re- cent increase in production was achieved by improving the efficiency of ex- isting mines and of rail transport. The Government has now finalized a pro- spective plan which aims at raising coal output to 184 Mmt by 1985/86 - 41% of the increase being required for power generation, 18% for steel making and another 41% for other sectors. 6. The coal sector is largely nationalized, with only two captive mines of steel producers remaining outside the public sector. The public sector is controlled by Coal India Limited a public company created in 1975 by consolidating the Coal Mine Authority Ltd., Bharat Coking Coal Ltd. and the Singareni Collieries Ltd. 7. Various studies by public and private agencies show that coal will continue to play a very significant role in India's future energy supply. It is currently estimated that coal production should reach 184 Mmt. by 1985 and about 340-370 Mmt by 1990 compared to a target of 135 million tons at the end of the Fifth Plan. According to the K. Parikh study this would require the following investments (the figures indicated below are the average between the minimum and maximum requirements). 1975-1984 1980-1990 Rs US$ Rs US$ million million million million Coal Mines New mines 13,140 1,460 18,100 2,010 Replacement 860 95 1,080 120 Sub-total 14,000 1,555 19,180 2,130 Exploration 750 85 1,000 110 Treatment 970 105 1,300 145 Total 15,720 1,745 21,480 2,385 Transport 13,940 1,550 12,170 1,350 Total 29,660 3,295 33,650 3.735 Source: K. Parikh. Second India Studies - Energy. 1976  ANNEX 5 The large investment in several sectors (mining, industry- and transport) will require considerable planning and coordination. The steps taken after 1973-74 to improve the availability of spares, and to impro.:: the produc- tivity of existing mines and of rail transport appear to be in the right direction. However some difficulties remains in the financing of coal expansion and in coal pricing. (ii) Hydroelectric Power 8. India's hydroelectric power potential has been conservatively estimated at 41,000 MW (based on a 60% load factor) by the Central Water and Power Commission of which about 20% has been or is currently being developed. The north-eastern and northern regions, which include the Brahmaputra and Ganga rivers, account for 30% and 26% of the total potential, respectively the balance being located in the eastern (6.5%), western (17.5%) and south- ern regions (19.6%). To some extent the availability of hydropower redress the differences which arise from the very uneven distribution of coal re- serves. 9. Although India's hydroelectric power generating capabilities are substantial, the date by which they might be put to use is remote in most cases as the hydropower sites are located far from the main demand centers. For example, it is unlikely that power consumption in the north-east will require more than the development of a small part of the identified Doten- tial. A possibility for a larger role of hydropower could be a more coordinated approach towards multipurpose projects which would combine irrigation, water supply and power generation. 10. In the long run the share of hydroelectric power is expected to decrease from its current 41% of total power generation to about 35% in 1990/91, and thereafter. Total investments in hydropower plant are pro- jected at Rs 52.0 billion (US$5.8 billion) between 1975 and 1990. (iii) Nuclear Fuels 11. Resources of nuclear fuels in India consist of uranium and thorium. The first of these is already in use for the generation of electric power in India, and it is planned that future facilities will use domestic- ally produced uranium as a fuel. The main concentration of uranium is in Bihar and is exploited in two mines; some other deposits, of a lower con- centration, may be worth developing in Udaipur and Rajasthan. The Depart- ment of Atomic Energy is responsible for uranium exploration in collabora- tion with other Government agencies. 12. On the basis of current reserves, and with the technology which is currently in use, uranium supplies would meet the demand for a limited time, depending on the rate at which new nuclear facilities are built. This period could be extended by improvement in technology and the use of fast breeder reactors which are not yet commercially exploitable.  ANNEX 5 Page 4 of 7 13. The future development of nuclear fuels will to a large extent depend on the development of other fuels, mainly coal. It is estimated that nuclear generation will increase from the current level of 600 MW to about 8,500 MW by 1990. In view of the cost of nuclear power and of the time involved this objective appears optimistic. (iv) Hydrocarbons 14. Current hydrocarbon recoverable reserves onshore are estimated at about 203 million tons of oil equivalent (Mmtoe) of which petroleum reserves account for 65% and gas reserves for 35%. Most of the onshore reserves are located in two states, Assam in the northeast where oil was first discovered, and Gujarat in the northwest which was developed in the 1960's by the Oil and Natural Gas Commission (ONGC). The current ratio of reserves to produc- tion is currently of 19 and 41 years for petroleum and natural gas, respect- ively. 15. The total sedimentary area in India is about 1.7 million sq. km of which 1.4 million sq. km are onshore and .3 million sq. km. offshore within the 200 m water depth (Continental Shelf). A total of 27 sedimentary basins have been identified, with prospects ranking from good to poor, of these nine have been explored and three (Assam, Gujarat and Bombay High) have yield oil, exploratory drilling in the other six basins has not resulted in any notable discovery. Work in the remaining 18 basins is either in progress or will be commenced in the near future. The most promising areas are: - the Cambay (Gujarat) and Assam-Arakan areas which are known to contain commercial deposits of oil and natural gas; - the Cauvery, West Bengal, Jaisalmer Teipura, Cachar and Andaman Nicobar areas which have good prospects but so far have no known commercial deposits. 16. Until 1972/73 most of the survey and exploration effort of inter- national and domestic oil companies was concentrated onshore with the ex- ception of a geological-geophysical survey carried out by Soviet experts in the mid-1960's. Although three companies are producing petroleum and gas in India - the Assam Oil Company (AOC), Oil India Ltd. (OIL) in which the GOI has a 50% participation and ONGC which is a fully government-owned agency - only OIL and mostly ONGC were involved in onshore exploration. At the end of 1975 ONGC had drilled about 1,235 exploration and develop- ment well onshore of which 250 and 950 were located in Assam and Gujarat respectively. These efforts have resulted in the discovery and development of about 25 oil and gas fields. The survey of the offshore potential car- ried out by Soviet experts identified 12 potential structures mainly in the Arabian Sea. The exploration of those located in the Bombay area has re- sulted in the discovery of Bombay High and of North and South Bassein.  ANNEX 5 Page 5 of 7 17. While ONGC's and OIL's exploration programs onshore have been reasonably successful, it is the opinion of many experts that their past and current exploration programs are not commensurate with the size and prospects of the prospective areas particularly offshore. GOI and ONGC officials share this opinion and have decided to step up exploration programs in the most promising areas onshore, to build up ONGC's offshore exploration capacity and to cooperate with international oil companies in exploration for and development of hydrocarbon reserves offshore. This program which was initiated in 1972/73 has already brought about significant results: (a) onshore reserves which had been declining since 1961, have increasSd by about 17 million tons of oil and about 27 billion m of natural gas; (b) offshore ONGC has discovered the Bombay High field and the adjacent North and South Bassein fields which are expected to have initial rscoverable reserves of over 250 /1 Mmt of oil and 30,000 Mm of natural gas (Annex 3). In addition, India has entered into production-sharing/participation agreements with three oil companies which are currently exploring in the Gulf of Kutch and off Bengal (Reading and Bates Asamera and Natomas). 18. In the future ONGC will have a leading role in onshore exploration, although it is expected that OIL will step up exploratory drilling. ONGC's current plans onshore call for: (a) a review of all geological and geophysical data collected so far, with more powerful analytical tools. For this purpose the computer facilities of ONGC headquarters in Dhera Dua have been modernized and geologists and geo- physists are being trained in modern interpretation techniques; (b) the concentration of effort on a limited number of potential areas where ONGC personnel and foreign con- tractors will apply geological and geophysical techniques and will drill in deeper structures where the prospects appear to be more promising; and (c) the exploration of areas which have not been explored previously because of the technical and geographical problems involved (infrastructure, access, etc.). Although ONGC plans appear reasonable, they have not yet been formulated in great detail and there appears to be considerable room for improvement of ONGC's approach to onshore explorations, particularly in the deployment of crews and in the selection of priorities among projects. i/ These reserves could be increased by 85 YMmt of oil if probable reserves under evaluation are confirmed.  ANNEX 5 Page 6 of 7 19. As indicated in para. 17 the responsibility for exploration off- shore is shared among ONGC and foreign oil companies operating under pro- duction sharing contracts. Prior to 1976 ONGC had practically no experience offshore. In the course of three years ONGC succeeded in discovering a giant oil/gas field and two other fields of lesser importance and to bring these fields under production while continuing exploration. To achieve these remarkable results, ONGC has followed a pragmatic policy of "owner assisted development" 1/ whereby ONGC would hire knowledgeable contractors to carry out development work, while ONGC staff, assisted by consultants, retained the decision-make responsibility, and acquire the expertise. This approach has enabled ONGC to minimize the acquisition of heavy equipment (drilling rigs, barges and supply boats) to what was justified by proven fields and required to train their own personnel. 20. The main objective of ONGC's offshore policy is first to complete exploration in the Bombay offshore areas (some structures at the limit of the continental slope remain to be drilled) and to move south of Bombay where other projects have been identified. Although no definite program has yet been decided upon (outside of the Bombay offshore area) it appears that ONGC's program for the next two years will include about 20 exploratory/ delineation well offshore. This program appears consistent with the pros- pects that have been identified so far and with ONGC's resources. 21. Future investment in offshore exploration and development asso- ciated with the development of Bombay High and North Bassein is described in Annex 12. B. Non-Commercial Energy 22. Non-commercial energy consists chiefly of fuel wood and animal wastes, mainly cow-dung, used in the domestic sector. (i) Fuel Wood 23. Total consumption of fuel wood is not known precisely, but is estimated at about 130 million tons per year, thus exceeding by more than 50% the output of the coal industry. Fuel wood is used predominantly in the domestic sector and its utilization has been a source of concern to the GOI. India has a forest area which accounts for about 23% of the total geo- graphical area, which is well below the world average. Of this about 60% is considered exploitable and about 20% potentially exportable. Efforts have been made to increase the forest area and to control the use of fuel wood. These efforts appear to have brought about some results and between 1960 and 1970 the forest area increased by about 8.7% from 69 million hectares to 75 million hectares. However, the increase in oil prices of 1973/74 has had a detrimental effect on the demand for fuel wood, which appears to have increased as the price of kerosene went up. The GOI is 1/ As opposed to the concept of "operator" whereby the owner of the field entrusts the full responsibility of its development to a contractor.  ANNEX 5 Page 7 of 7 considering the creation of plantations of fast growing trees to meet future demand and the implementation of tighter controls on fuel wood utilization to prevent deforestration. However, in the absence of data, it is impossible to quantify the impact of higher kerosene prices accuratly. (ii) Vegetable Wastes and Cow-dung 24. Together these two fuels account for about one-third of total con- sumption of non-commercial energy, according to estimates of various Agencies in India. Cow-dung and vegetable wastes are cheap sources of energy, however, their use as fuels has been very controversial since they could possibly be used more efficiently as fertilizers. The strength of this argument depends on what it is reasonable to assume for the cost of alternative fuels and on the effectiveness with which cow-dung could be used as fertilizers. In this connection India has launched an experimental program for the construction of small biogas plants. C. Prospective Energy Sources 25. So far little is know about geothermal energy and/or solar, wind and tidal energy potential. Although there are a large number of hot springs in India, the total exploitable potential of geothermal energy appears very small. Despite a long coast line, there are very few sites which have tidal ranges which would permit commercial exploitation and the total potential is estimated at less than 1,000 NW. Wind could be a potential source of energy provided the technology exists. Solar energy appears to be the most promising source of prospective energy, as the annual solar intensity averages 600 calories per sq. cm. Although India has been conducting some experiments, particularly in rural areas, it does not appear that solar energy will play a substantial role in total energy supply in the near future.  ANNEX S Table 1 INDIA BOMBAY HIGH DEVELOPMENT PROJECT Coal Reserves (Mtoe) Proven Other Reserves Reserves Total x 1. Coking Coal: Prime coking coal 3,650 2,000 5,650 6.8 Medium coking coal 3,850 5,581 9,431 11.4 Low-grade coking coal 1,559 3,514 5,073 6.1 Total 9,059 11,095 20,154 24.3 2. Non-coking Coal 12,306 48,490 60,796 73.3 3. Lignite 1,795 230 2,025 2.4 Total 23,160 59,815 82,975 100.0 Source: Report of the Fuel Policy Committee (1974) January 1977  ANNEX 5 Table 2 INDIA BOMBAY HIGH DEVELOPMENT PROJECT Hydroelectric Potential by Region Region Power Potential x (MW) Eastern 2,695 6.5 Northern 10,790 26.2 Western 7,160 17.4 Southern 8,040 19.5 North-eastern 12,465 30.4 Total 41,150 100.0 of which Run of the River 10,300 25.0 Storage 29,850 75.0 Total 41,150 100.0 Source: Report of the Fuel Policy Committee (1974) January 1977  ANNEX 5 Table 3 INDIA BOMBAY HIGH DEVELOPNENT PROJECT Hydrocarbon Recoverable Reserves (Mtoe) Crude Oil Natural Gas Total Onshore Gujurat 46.0 14.0 60.0 Assam 84.0 59.0 143.0 Total 130.0 73.0 203.0 Offshore Bombay High 126.0 /1 15.0 /2 141.0 Bassein North 34.0 /1 4.0 /2 38.0 Total 160.0 19.0 179.0 Grand Total 290.0 92.0 382.0 /1 Assuming -gas lift only, if water injection is taken into account would increase to 250 Mtoe. /2 Assuming a Gas Oil Ratio (GOR) of 100. Source: ONGC and Indian Petroleum and Petrochemical Statistics 1975, DeGolyer and MacNaughton.  INDIA BO1DBAY HIGH OFFSHORE DEVELOPMENT PROJECT PAST PETROLllUM PRODUCTION AND CONSIMPTTION (000 Tons) 1965 1970 1971 1972 1973 1974 19'5 A. CPMDE PETROCLEUM Production ONGC onshore 1,122 3,632 3,941 4,097 4,012 4,338 5,128 0T130 ofwstaore - - - - - - - OIL 1,7L2 3,070 3,116 3,183 3,102 3,080 3,087 AOC 1cg 107 98 93 84 72 68 Total 3,022 z9 7 5 7,373 Tl90 7-,29 3 Imports 6,311 11,665 12,688 12,310 13,643 13,973 13,669 ;=orts 18 -Aparen-.. change in stocks 79 15 285 11 105 680 117 rotal interral consumption 9,754 18,L59 19,588 19,672 20,518 20,783 21,535 Cionsumotion irn refineries 641 1,282 1,359 ,468 1,393 1,10 1-03 Total i:ternal final .32 cons,xnpt4on 9,113 17,177 18,229 18,204 19,125 19,303 20,532 3. PRODTJCTION OF ST-ROLlUM PRODUCTS Crude petroleum innut 9,754 18,459 19,588 19,672 20,518 20,783 21,835 - Losses in refineries and fuel 041 1,282 1,359 1,468 1,393 1,680 1,303 Total production 9,113 17,177 18,229 18,204 19,125 19,303 20,532 I mports 2,880 970 1,932 3,257 3,735 2,969 2,180 - ExDcrts 3L5 L12 152 109 155 202 16c B-unker deBveries 378 2Lh 230 175 234 136 :15 - Apparent changes in stocks (598) (96) 290 (227) (12) 87 (19) otal internal final consumption 11,868 17,587 19,439 21,606 22,683 21,827 22,380 of which: Light distillates 1,361 2,575 2,996 3,232 3,491 3,323 3,603 Middle distillates 6,186 8,870 9,757 10,517 11,004 11,200 11,545 Residuals 3 191 L 651 , 976 5 549 5 932 5 705 5 806 Sub-Total 10,738 16,096 17;725 19,34d 20;,27 20'228 20,952 Jon Energy Products 1,130 1,L91 1,764 2,056 2,056 1,599 ', 28 TOTLAL 8 '.7 9,89 7OL 2 827 22.,1? Source: Indian Petroleum and ?etrochirca]l Statistics 1975 June 1977  ANNEX 7 Page 1 of 7 INDIA BOMBAY HIGH OFFSHORE DEVELOPMENT PROJECT Development of Hydrocarbon Resources in India Policies and Constraints A. Introduction 1. Two different approaches can be followed by a developing country in the exploration for and development of its hydrocarbon resources. It can enter into an agreement with a foreign oil company whereby the latter would explore for and develop hydrocarbon resources and/or it can entrust respons- ibility for development to a national agency. These two approaches are not mutually exclusive, and several countries have been using both of them simultaneously or in sequence. The rationale for preferring one approach to the other, or for using both does not solely depend on economic and tech- nical criteria. In most developing countries the choice between foreign and national companies carries considerable social, political and philosophi- cal implications. In India policies regarding the development of hydrocarbon resources changed over time from an almost total dependence on foreign compa- nies to a strong emphasis on self-reliance. Recently, however, India has followed a policy of compromise between foreign participation and national autonomy. The following sections are an attempt to summarize the main policies followed by the Government of India (GOI) at various stages and to highlight the constraints, issues and problems which underlined these policies. B. India's Policies in the Petroleum Sector (i) The Early Years after Independence 2. In the wake of independence, India was almost totally dependent on the import of refined petroleum products. In 1948 the Assam Oil Com- pany (AOC) a subsidiary of Burmah Oil produced about .25 MmT of crude oil which was refined in a small plant near Digboi whose production of .19 Mmt was less than 7% of total petroleum consumption in India that year. The balance was met by imports of refined products which were controlled by three foreign companies Burmah-Shell which accounted for over 50% of the market, Standard Vacuum Oil Company (Stanvac) and Caltex a joint venture of Standard Oil of California and Texaco. 3. In the early 1950's, the GOI realized that future economic growth would necewssarily lead to an ever-increasing demand for liquid fuels, even if domestic coal reserves were developed to the maximum possible extent. It  ANNEX 7 Page 2 of 7 also realized that a continuing reliance on imports of refined products would prove to be less reliable and more costly, in terms of foreign ex- change, than the import of crude oil which could be refined locally. Be- tween 1948 and 1951, t'-e GOI approached foreign oil companies and proposed the establishment of domestic refineries based on imported crude. This decision, however, was a departure from the principles of the Industrial Policy Resolution of 1948 which stated inter alia that the Government should be responsible for the future development of the petroleum sector. The main reasons for the GOI decision were: (i) the difficulty in mobilizing foreign exchange and local currency resources to finance Government-owned refineries; (ii) the lack of expertise in petroleum refining, which at that time was very strongly dominated by international oil com- panies; (iii) the lack of expertise in the distribution and marketing of refined products and the potential conflict with foreign companies who might have refused to market the products of Government-owned refineries; and (iv) the hope that after having invested in refineries, foreign companies would also invest in exploration for and develop- ment of petroleum resources in India. 4. Agreements were signed in late 1951, whereby Stanvac and Burmah- Shell would each build a refineries with a capacity of about 1.0 and 1.5 Mmt, respectively. A third agreement was entered into with Caltex in 1953 for the construction of a third refinery. 5. At about the same time, the GOI entered into a joint venture agree- ment with Stanvac, known as the Indo-Stanvac Project, for exploration in the Bengal Basin. According to this agreement, the GOI was to provide 25% of the funds required for the operation of the project; Stanvac was to provide 75% and was entitled to 75% of the production. Stanvac retained responsibility of the overall management of the project. If oil was found, it was to be priced at import parity. In addition, the agreement included a number of tax exemption clauses which reflected the GOI's opinion that it was in the na- tional interest to attract international companies to invest in petroleum ex- ploration and development in India. This project was, however, abandoned in 1960 without producing any positive results. 6. After long negotiations, the GOI also entered into a joint venture agreement with Burmah Oil which resulted, in 1959, in the creation of Oil India Limited (OIL) a private company in which the GOI had initially a one- third interest. OIL's prospective area was limited to the north-east of India. The GOI participation was subsequently increased to 50% in1961, when OIL's prospective area was enlarged to some areas in the North-East Frontier Area and Assam. OIL agreed to sell all its oil to the GOI, and  ANNEX 7 Page 3 of 7 agreed that crude oil would be priced so as to allow a return of 9-13% on the paid-up share capital. In this the GOI was departing from the import parity price concept of the Indo-Stanvac Project and was moving toward a cost-plus pricing policies. 7. While the Indo-Stanvac Project did not bring about any discovery, OIL was more successful, at least in the early years of operation; and pro- duction increased from about .25 Mmt in 1959 to 1.4 Mmt in 1964 and reached a peak of about 3 Mmt in 1970, which it has maintained since. However, OIL has not made any significant new discovery in the recent past and its produc- tion is expected to decline sharply in the early 1980's as its fields are depleted. 8. One of the major clauses of the agreement signed with foreign com- panies in setting up- refineries in India provided that they would have the freedom to choose their sources of supply and that crude oil prices would be determined on the basis of world market prices (posted prices) at the time and place of shipment. Within the framework of integrated companies, this really meant that India's domestic refineries were a captive market for the purpose of selling the companies' own crude oil. Retrospectively, these clauses and other clauses governing equity participation, duties and taxes appear somewhat inflexible, but one has to remember that at the time the "maj ors" dominated the market and would not have agreed to anything else. Also the GOI had no alternative other than to continue importing products, at a higher-cost than crude oil. 9. As a result of this policy, domestic production of refined pro- ducts increased from less than .2 Mmt in 1952 to over 4.5 Mmt in 1957/58 thus meeting about 80% of total domestic requirements. The domestic pro- duction of crude oil, however, remained stagnant throughout the 1950's at less than .5 Mmt. 10. The GOI's decision to invite foreign companies to build and operate domestic refineries rather than continue importing refined products or trying to procure the expertise from consultants appears to have been justified. Foreign exchange savings (compared to imports of products) have been estimated at about US$150 million between 1955 and 1960. 1/ However, the changes which occurred in the late 1950's and 1960's in the world oil market led the GOI to reconsider its policy. 1/ R. Vedavalli. Private Foreign Investment and Economic Development a case study of Petroleum in India.  ANNEX 7 Page 4 of 7 (ii) The Changes of the Late 1950's and the 1960's 11. The early 1950's had been characterized by a monopoly of the major oil companies on oil supplies and a balance between supply and demand. In late 1950's and in the 1960's several factors contributed to change this situation. Large volumes of oil were discovered by so called "independent" companies and by national companies sponsored by European governments (France, Italy) in countries which were not yet producers; surplus oil from the USSR became available on the market; and the U.S. introduced import quotas to pro- tect their own industry. This resulted in excess supplies and rapidly dec- lining prices. While posted prices did not change substantially, a number of companies introduced a system of rebates which greatly reduced the real cost of oil supplies to a number of importing countries. This, however, was not the case in India, where crude supplies to domestic refineries were procured by foreign companies at internal transfer prices which were based on posted prices. Until 1960 India was unaware of this situation, and it is only after the USSR offered crude at discount prices to India that the GOI started putting pressure on the companies to reduce their prices and investigating alternative ways of taking advantage of the favorable market conditions. Concurrently the GOI was still trying to attract foreign companies to par- ticipate in oil exploration. In the late 1950's the GOI convened a panel of international experts from Eastern and Western countries which recom- mended a strong impetus from privately financed exploration and development. The GOI invited companies to make proposals by early 1960. Fourteen com- panies responded but were unable to come to terms with the GOI, the only agreement reached was a modification to the GOIt's participation in Oil (1961). 12. Faced with an ever-increasing oil import bill, the GOI had several policy options: (i) finding oil in India to substitute domestic production for imports of crude oil. As we have seen, the GOI had been trying successfully to attract foreign oil companies to explore in India. The failure to obtain foreign com- panies' cooperation led to the creation in 1956, 1/ of the Oil and Natural Gas Commission (ONGC), which was given the task of exploring for and developing oil resources in India outside the areas being prospected by Oil. At about the same time the GOI turned to the USSR and Eastern European Countries for technical and financial assistance in setting up an explo- ration group and in building the first state-owned refineries. by 1965 ONGC had discovered a significant amount of oil and Gas in Gujarat; (ii) Reducing the cost of imports of crude oil. This could be achieved in two ways; by obtaining cheaper crude supplies 1/ ONGC became an independent statutory Commission in 1959, prior to this date, it was operating within the Geological Survey of India.  ANNEX 7 Page 5 of 7 on the world market through discount and/or barter deals, and by putting pressure on the companies owning the existing refineries to match the terms offered by their competitors. However, it implied that the GOI would own sufficient refinery capacity to refine whatever crude it could obtain at lower cost, since the companies refused to refine oil that they had not procured. From 1956 to 1970 the GOI followed a policy which included these three components. Various committees were appointed to look into the crude oil pricing practices of oil companies. The GOI under- took to create a public refining sector, with the assistance of the USSR and other eastern European countries, which resulted in the creation of Indian Refineries Limited - IRL - in 1958 to construct and operate the refineries of Gauhati, Barauni and Haldia. The main purpose of these steps was to break up the monopoly of the foreign companies, which were denied the right to expand or to process domestic crude yielded by the discoveries made by OIL in Assam and by ONGC in Gujarat. In 1964 IRL was merged with the Indian Oil Corporation (IOC), which had been created for the purpose of importing and exporting products; and (iii) The two remaining possibilities were to obtain foreign assistance to finance the rising cost of oil imports and/or to discourage the growth of demand for petroleum products. The former was not available until the oil crisis of 1973/74, and the latter did not offer substantial possibilities for savings since the con- sumption of petroleum in India is comparatively low and since there is very little "fat" to eliminate. 13. The results of the GOI policies in the late 1950's and 1960's can be summarized as follows. On the one hand, the GOI and the various agencies dealing with petroleum at any stage of its production/utilization gained con- siderable experience in all fundamental aspects of the industry. In par- ticular knowledge of the country's geological potential improved substan- tially. 14. By the end of the 1960's ON C and OIL had proved oil reserves of about 175 MMmt of oil and of 75,000 Mm of gas (Annex 1). Their combined pro- duction covered about 37% of total crude consumption in India. Total refin- ing capacity was about 17 Mmt, covering more than 90% of the country's total product requirements. There was a body of trained technicians in almost all facets of the industry. This compared to the situation twenty years pre- viously was certainly an achievement India could be proud of and which proved economically justified. Most analysts estimate that the return of OIL and ONGC's investments has been 13-19% at pre-1973 prices. However, only a small portion of the potential oil bearing structures had been fully explored and no significant discovery had been made since ONGC struck oil in Gujurat in the early 60's.  ANNEX 7 Page 6 of 7 C. The Early 1970's - The Move Offshore 15. While the early part of the 1960's had witnessed a decrease in the price of oil in real terms, this trend was reversed in the late 1960's and early 1970's until the chaotic increase in world oil prices in 1973/74. The main reasons for this change were: the increased demand of Western Europe, Japan and eventually the US in the early 1970's; the drastic modifications in the agreements linking host countries and international oil companies, which decreased the availability of low cost crude oil to the latter; and the growing awareness that petroleum reserves were finite, and that producing countries, which relied solely on their exploitation to earn foreign exchange, should have a deciding voice as to what the optimum rate of depletion should be. This resulted between the end of the 1960's and 1973/74 in a steady' increase in oil prices which severely affected the balance of payments of oil importing countries, particularly India. At the same time these changes in the world market for oil created a renewed interest in having foreign com- panies to explore in areas which were not believed attractive previously, to secure low cost supplies. This new exploration effort was accompanied by the introduction of new types of agreements with host govern- ents (production- sharing), whereby the foreign companies were willing to invest in explora- tion (risk capital) and to participate in development expenditures provided that, in the event of a commercial discovery, they could (a) recover their initial expenditures and (b) dispose of a share in the total production. Most of these new ventures took place outside OPEC countries and were directed to the exploration and development of offshore potential areas. 16. Previously, the world market conditions had not been favorable to foreign investment in oil exploration in India. However, by the late 1960's the situation had changed somewhat, the surveys conducted by the USSR tech- nical assistance team had identified a number of prospective areas off- shore and oil companies were willing to move in the area to explore and subsequently develop oil potential provided that they could reach an agree- ment with the GOI. The GOI was not adverse to such cooperation and negotia- tions were initiated in the late 1960's with Tenneco (US) for the exploration and possible development of the Bombay High structure. The Tenneco proposal was a typical production sharing agreement. Tenneco would bear the full cost of exploration and, if oil was discovered, a joint company would be created in which the GOI would have a majority interest (51%), after five years man- agement would be transferred to the GOI and Tenneco would retain 49% of the production. In many respects this proposal was attractive, it provided ade- quate financing for risk capital, and additional financing for development expenditures, it also had a substantial training component in offshore opera- tion in which ONGC had no practical experience. AfLter long negotiations, the GOI rejected Tenneco's offer, apparently on the 'ground that the share of pro- duction to be allocated to the foreign partner was too high. The GOI further decided that ONGC would explore and develop the BH structure. At almost the same time the GOI decided to open 10 offshore areas to foreign oil companies and three production sharing contracts were signed with Reading and Bates (U.S.), Natomas (U.S.) and Asamera (Canada) to explore in the Kutch Basin, in the Cauvery Basin and in the Bay of Bengal.  ANNEX 7 Page 7 of 7 17. In many ways a historical overview of India's past development policies in the petroleum sector reflects the traditional problems of nego- tiations between unequal partners. In the early years, the oil companies were extremely powerful and the GOI had no experience in the oil industry. This resulted in agreements which in the light of later developments appear to have been in favor of the foreign partners, although most analysts agree that these agreements had a positive effect on India's balance of payments. In the 1950's, when India had acquired some expertise and tried to attract foreign companies to develop its potential, the latter were not interested because of unfavorable world market conditions, and this led to the creation development of OIL and ONGC, which have both been successful. In the recent past India has been trying to find a reasonable balance between foreign and national investment. However, despite the opening of offshore areas to for- eign companies, relatively few have applied for licenses. 18. In the wake of the price increases of 1973/74 the GOI made some drastic changes in its policy towards development of petroleum resources: (i) steps were taken to increase production from existing fields from about 7.5 Mmt/yr to 9.0 Mmt/yr within 3 years by using enhanced recovery techniques whenever feasible; (ii) first priority was given to the exploration and rapid development of the Bombay High and adjacent structures. The execution of this project was assigned to ONGC, which benefited from ad hoc procedures to by-pass the usual red tape involved in getting import licenses and foreign exchange allocations; and (iii) ten offshore areas were opened to foreign companies and three production sharing type agreements were signed with three foreign companies. It appears that in the future ONGC will be the main Government agency in exploration for and development of petroleum resources onshore and offshore. In the Bombay High area, ONGC has developed so called "owner assisted pro- cedures" which enable them to use foreign consultants and contracts while retaining the responsibility of the development and training of their own staff in offshore techniques. These procedures have been successful. How ONGC will proceed in the future depends largely on its further success in discovering oil offshore and of the results of exploration by foreign com- panies.  ANNEX 8 Page 1 of 4 INDIA BOMBAY HIGH OFFSHORE DEVELOPMENT PROJECT Evaluation of Bombay High and Bassein Reserves 1/ A. Geology 1. The main hydrocarbon accumulations in the Bombay High field are found in a Miocene carbonate section referred to as the LIII Zone. Lesser accumulations of gas are present in the overlying LII Zone which is not included in the initial development plans. The LII Zone is a multi-layered structure consisting of several carbonate stringers separated by shale and marle beds. These carbon stringers are referred to as the A and A Zones. There are other hydrocarbon bearing beds in this field: the i Zone hich is sometimes developed between the A and A Zones and the B, C and D Zones 1 2 which underlie the A2 Zone. Present development plans do not include exploi- tation of these other zones (see Maps). 2. The hydrocarbon accumulations in the Bassein and South Bassein fields are found in a carbonate reservoir lithiologically similar to the Bombay High field but of Oligocene rather than Miocene. The Bassein struc- ture contains both oil and gas, but the South Bassein structure is a gas- condensate reservoir with no oil column. B. Reserves 3. During the course of exploration and initial development, ONGC has had various organizations evaluate the potential oil reserves of the Bombay High field. The findings are tabulated below: Oil In Playe Oil Recovera1le (Million m ) (Million m Compagnie Francaise des Petroles 1,416 min.m Gulf Oil Co. (Geoman) 1,622 max. 175 Institute of Petroleum Exploration 1,060 190 Bombay High Offshore Group - 209 4. To obtain an updated and independent assessment the Bank in agreement with the ONGC hired D&M to appraise the Bombay High and Bassein reserves. 1/ This annex is based on the conclusions of an independent evaluation made by DeGolyer and MacNaughton (D&M) in December 1976 and January 1977, at the request of the Bank.  ANNEX 8 Page 2 of 4 The results of D&M's appraisal were reported in January 1977 and are sum- marized in the following table. The "proved" and "probable" classifications are defined as follows: (i) Proved - These reserves have been proved to a high degree of certainty by reason of actual completion, successful testing, or in certain cases by adequate core analyses and are defined really by reasonable geological interpretation of structure and known continuity of an oil - or gas-saturated reservoir. These reserves are limited by the lowest contour closing on established productivity. (ii) Probable - These reserves, susceptible of being proved, are defined by less direct well control but are based upon evidence of producible gas or oil within the limits of a structure or reservoir above known or inferred water saturation. These reserves are limited by the lowermost perforation in the productive interval or by the base of the productive interval when there is not evidence of a hydrocarbon-water contact.  TABLE I SUMMARY of OIL Ol(iGINALLY in PLACE and ESTIMATEI) ItESERVES for BOMIJAY HIGHl anid BASSEIN FIELI)S OFFSHIORE INDIA as of JANUARY 1, 1977 BOMBAY filCH FIELD BASSEIN FIELD A, ZONE A2 ZONE Item Unit Proved Probable Proved Proved Probable Voluitile .i......e . m3 x 106 253 720 5,640 48 1,813 Average Thickiness ................... m 2.75 6.6 11.9 Porosity . .... . .. Percent 29.1 29.0 20.5 Water Satration. .Percent 31.9 30.3 26.8 Formation Voluime Factor 1.38 1.38 1.38 Estimated Originial Oil in Place m3 x 106 36.3 103.4 826.2 5.3 197.2 Fstimated Recoverable Oil and Producing Mechanisii . .[3 x 106 9.8 DI 70.2 D4 40.9 CL7 24.4 CL2 140.5 GL' 41.9 GL and W13 258.6 GL and W16 Depletion -- At 6 yeats the assigned economic limit of 3,000 m3/d was reached (20 wells). 2 Gas Lift - At 9.2 years the assigned economic limit of 3,000 m3/d was reachied, GOR limit of 1,000 m3/m3 was not reached (FBIIP = 70 kg/cm2). 3 Gas lift and( Water Injection -- At 13.5 years the assigned econoinic limit of 3,000 m13/d was reached. Water injection equivalent to withdrawals. 4 Deplelion - At 15.2 years witli 80 wells tlie economilic limit of 7,200 m3/d was reached. Gas Lift - At 16.8 years withi 80) wells the COR exceeded 1,000 m3/m3. 6 Gas l ift and Water Injection -- At 23 years witli 80 wells ilte water saturation in the oil column reachied 50 percent. Gas l.ill - At 8 years willt 40 wells the economlic limit of 5,900 mn3/d was reachied. In . (D  ANNEX 8 Page 4 of 4 5. Because of natural pressure decline during depletion of the reser- voirs, at some point in the future it will become necessary to maintain well flow through gas lift and other pumping devices. Also, introduction of appro- priate secondary recovery methods will enhance the quantity of recoverable oil. These optimization measures have not yet been studied, but D&M estimate that gas life and water injection could raise recoverable oil reserves from A and A2 Zones to 41.9 and 258.6 million cubic meters respectively. 6. No evaluation has been made of the natural gas deposits in the Bassein South structure. The quantity of gas dissolved in the Bombay High and Bassein oil reservoirs will yield approximately 100 cubic meters of natural gas for every cubic meter of oil produced. As reservoir pressures decline this ratio will increase, that is, the production of gas per unit volume of oil will become greater as time goes on during the production life of the reservoirs. C. Production 7. At the request of the Bank, DeGolyer and MacNaughton have carried out a two dimension study of the Bombay High reservoir (Bassein North was not included since not enough production history was available). The results show that the most likely development plan would include about 80 development wells at peak production of about 225,000 b/d. Peak production could be reached in the early eighties, depending on ONGC's drilling programme and could be maintained fo5 8 years, using water injection. Total recovery would be 202 million m of oil or 21% of the total active oil in place. The life of the field would be about 30 years. D & X production program is given in Table 1. Sensitivity analysis shows that other development plans would lead either to lower recovery or to the same recovery at higher costs.  INDIA BCMBAT HIGH OFFSEDRE DEELPKENT PROJECT Projected Production Schedule from the Bombay High Field PREDICTED PERFORMANCE ----------DAILY RAT ES------ - ----------CUMULATIVE PRODUCTIO ON--------- --.ELLS- PESEPVOI.. WATER GAS WAIER GAS NEC YEAR pC:D ittJ PPER,JFE OIL GAS WATER INJECT. INJECT. GOR WATER OIL GAS WATER INJECT. INJECT. OI KG/SQ.CM4. i13 M M3 M3 M3 H3 H3/M3 PCT H M3 mm H3 M H3 M H3 1 ?5 PCT. 77.00 4 0 153 1028 109 0 0 0 106 0.0 2BI 29 0 0 0 .0 78.00 12 0 152 S749 593 0 0 0 103 0.0 23i80 246 0 0 0 .2 7j.00 20 0 151 i2215 1203 0 0 0 98 0.0 6839 685 0 0 0 .7 80.00 2'3 0 149 Id243 1760 0 0 0 96 0.0 13498 1328 0 0 0 1.4 81.00 4Q 4 14S 2 17.3 2594 0 7153 0 95 0.0 23416 2Z75 0 2611 0 2.4 e.0.oo 52 8 147 35613 3369 0 16692 0 95 0.0 365415 3505 0 8704 0 3.8 7.0.30 o4. 24 150 35671 3348 10 36614 0 94 .0 49435 4727 3 22069 0 5.1 83 8O 28 152 35771 3364 969 50378 0 94 2.6 62492 5955 357 40459 0 6.5 e3.0o 7o 26 153 3i 771 3472 Z997 51367 0 97 7.7 75549 7222 1451 59210 0 7.8 -2 O 7 3 2d 154 85771 34c4 4340 50125 C 96 10.8 88c05 e4.72 3035 77508 0 9.2 i7.O9 :69 28 15'4 3'772 333d 4149 4c8778 0 93 1C.4 101662 9'o91 4550 95313 0 10.5 7r.13 w 54 23 115 3b771 350S 4250 46900 0 98 10.6 11'.719 10971 6101 112433 0 11.9 oD.^O 57 28 155 J3577i 327 4644 4S249 0 107 11.5 121776 12368 7797 128951 0 13.2 r.i') 43 28 155 3J."52 4051 3913 43662 0 120 10.4 140959 13847 9225 144b90 0 14.5 91.0S ea Z l5s Z4 333 2874 3501 37721 0 118 12.6 148941 14.897 10503 158660 0 15.4 92.09 30 2b 155 2 1It 3116 3394 35162 0 147 13.8 156674 16034 11742 172956 0 16.2 93.J^ 27 2S 186 1d56 3043 3122 37191 0 164 14.4 1 6:359 17145 1 2el 186332 0 1.9 ;,..v3 25 26 1S4 15 59 1695 35 97 2 (759 0 106 19.5 169 321 177 4 14304 197'21 0 17.5 5 .00 2" 23 155 127a7 1666 5363 27'613 0 130 29. 6 173'58 18372 16264 2C7112 0 18.0 93.0) 22 16 1513 1116 1910 5986 20 85 0 189 37.2 1 I (! 19069 1 6 e9 214/2t4 0 18.4 97. 0 21 16 152 1I1J I I6 7 5905 1 ?? 0 15'3 3'3.4 1 :1139 1Cs 03 2060i 221999 0 18.8 98 00 18 16 153 rr 94 1G43 573 IYeD9 0 117 39.2 184418 I9t'85 22717 Z29249 0 19.1 99.00 17 16 153 7t2L 778 .4737 18243 0 99 37.9 187276 201669 24464 23590b 0 19.4 0. 0J 17 lb 153 75ut 985 5046 19167 0 130 40.0 190038 20529 2 6306 242905 0 19.7 1.O 16 16 IS3 7420 957 45'(3 1;990 0 129 38.3 1927'47 2087 9 27Q85 249473 0 20.0 2.C0 13 16 154 704 . 900 3438 17976 0 128 32.8 196318 21208 29240 256035 0 20.2 3 Q 2 IZ 16 153 5blu 6i3 3bL06 15579 0 120 39. 7 197366 21453 30585 261723 0 20.4 4.00 12 16 154 5 037 830 3841 16340 0 165 43.3 199205 21757 31988 26760i 0 20.6 5.30 0 10 06 153 42264 490 3566 12666 O 114 45.4 200769 21 3t 332R9 272312 0 20.8 6.0C 100 1 153 3393 405 3303 10776 0 119 49.3 202007 22084 3 4495 276247 0 20.9 7.00 9 16 153 333b 351 3295 10197 0 105 49.7 203225 22212 35697 279970 0 21.0 Sc .ii7ce: DeCColyer MlacNaughton June 1977 COh;  ANN 8 -- Chart I PLATt U STRUCTURE MAP srrs + X + + TOP OF Al PAY ZONE 4t M(IET US - OS,A) BOMBAY HIGH FIELD OFFSHORE INDIA 'I-~~~~~~~~~~~~~~~~w ._F + fX~~~ + -w -134~~~~~~~~~~~ ,/36- -i3e + I C+ +/50 I~~~~~~~~~~ XA flwu. 14~~~~ t ~o Y ~o U -1 r 4- < wri n ' LEG_' L~~~~~~~~~~~~~~~~~~~~ a ,,....0T._  ANNEX 8 -- Chart II PLArE I OIL AND GAS PROOUCTIVE AREAS ,