Romania - Videle - Balaria Enhanced Oil Recovery Project

Document of The World Bank p G FOR OFFICIAL USE ONLY Report No. P-3300-RO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMFm" TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE INVESTMENT BANK OF ROMANIA WITH THE GUARANTEE OF THE SOCIALIST REPUBLIC OF ROMANIA FOR A VIDELE/BALARIA ENHANCED OIL RECOVERY PROJECT April 30, 1982 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 Currency Unit: Leu (Plural Lei) 1. Conversion Rate for Traded Goods effective January 1, 1981 Lei 15.00 = US$1.00 Leu 1.00 = US$0.07 2. Tourist Rate effective February 15, 1981 Lei 11.00 = US$1.00 Lei 1.00 = US$0.09 Fiscal Year January 1 to December 31 GLOSSARY OF ABBREVIATIONS EOR - Enhanced Oil Recovery IB - Investment Bank of Romania ICPPG - Institute of Research and Design for Oil and Gas Production Toe - Tons of Oil equivalent TPB - Trustul Petrolului Bolintin (Bolintin Petroleum Trust) ROMPETROL - Romanian enterprise for international economic cooperation in oil and gas  FOR OFFICIAL USE ONLY ROMANIA VIDELE/BALARIA ENHANCED OIL RECOVERY PROJECT Loan and Project Summary Borrower: Banca de Investitii (Investment Bank of Romania (IB)) Guarantor: Socialist Republic of Romania Beneficiary: Bolintin Petroleum Trust (TPB) Loan Amount: US$101.5 million (including capitalized Front-End Fee) Terms: Repayable in 15 years, including a 3-year grace period through semi-annual installments. Interest at 11.6 percent per annum. Relending Terms: Relending to the Bolintin Petroleum Trust at 12.1 percent per annum, repayable in 15 years including a 3-year grace period. The Government would bear the foreign exchange risk. Project Description: The project aims at reversing the recent sharp decline in oil production at two important oil fields, Videle and Balaria by introducing an advanced enhanced oil recovery (EOR) technique, namely in-situ combustion. Use of this technique is expected to result in increasing the ultimate oil recovery from about 15 percent under current techniques to about 39 percent of the oil initially in place in the reservoirs. This would result in an annual incremental production, at full development in 1986, equivalent to roughly 10 percent of the country's current net oil imports thereby saving some $0.2 billion (1981 constant dollars) per year in foreign exchange. The project covers the 1982-86 portion of a long term EOR program for the Videle and Balaria oil fields situated West-Southwest of Bucharest. It consists of: (i) drilling of about 910 new wells for air injection and oil production; (ii) construction of 24 oil and gas separation centers nine of which will be equipped with water injection facilities; (iii) construction of a central oil treatment, storage and pumping facility similar to the existing facility which will also be expanded; (iv) construction of a treatment facility for water reinjected into the reservoir; (v) construction of air injection facilities comprising five compressor stations; (vi) laying of approximately 1,300 km. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - of pipelines and flow lines for air and water injection, gas supply and fluid collection and disposal; (vii) construction of power substations and distribution lines, and treated water and steam supply facilities; (viii) construction of about 50 km. of main and 70 km. of access roads and field offices and laboratories; (ix) laboratory and field monitoring instruments; and (x) engineering and technical services. There are risks deriving from the heterogenous nature of oil reservoirs which introduce uncertainties in the prediction of operating results in EOR projects. However, in-situ combustion is an established commercial EOR technique and adequate provisions have been made in the project to minimize operating risks. Cost Estimates: 1/ Local Foreign Total ---------- US$ Million --------- Design, Engineering & Supervision 12.4 - 12.4 Land Development & Roads 18.6 0.6 19.2 Well Drilling 46.1 48.8 94.9 Well Completion and Hook-up 33.0 18.4 51.4 Compressed Air Supply 74.0 36.5 110.5 Other Facilities 32.4 11.5 43.9 Base Cost 216.5 115.8 332.3 Physical Contingencies , 25.4 13.4 38.8 Price Contingancies 43.6 26.7 70.3 Installed Cost 285.5 155.9 441.4 Incremental Working Capital 5.6 5.7 11.3 Front-End Fee on Bank Loan - 1.5 1.5 Total Financing Required 291.1 163.1 454.2 Financing; Local Foreign Total ----------US$ million---------- TPB Internal Funds 115.3 - 115.3 State Funds 175.8 61.6 237.4 IBRD - 101.5 101.5 291.1 163.1 454.2 Estimated Disbursement: ----------- US $ Million --------- IBRD Fiscal Year 1983 1984 1985 1986 Annual 46.0 37.4 13.5 4.6 Cumulative 46.0 83.4 96.9 101.5 Economic Rate of Return: About 29 percent. Appraisal Report: No. 3745a-RO dated April 30, 1982, Energy Dept. 1/ The project is exempt from sales and import taxes.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANCA DE INVESTITII (INVESTMENT BANK OF ROMANIA) (IB) FOR A VIDELE/BALARIA ENHANCED OIL RECOVERY PROJECT 1. I submit the following report and recommendation on a proposed loan to the Banca de Investitii (IB) with the guarantee of the Socialist Republic of Romania, for the equivalent of US$101.5 million (including the capitalized Front-End Fee of $1.5 million) to help finance a Videle/Balaria Enhanced Oil Recovery Project. The loan would have a term of 15 years, including 3 years of grace, with interest at 11.6 percent per annum. PART I. THE ECONOMY 2. The first basic report on Romania (Report No. 1601-RO, "The Industrialization of an Agrarian Economy under Socialist Planning") was circulated to the Executive Directors on April 20, 1978. An updating Country Economic Memorandum (CEM) was circulated to the Executive Directors on August 20, 1980 (Report No. 2757-RO). An economic mission visited Romania in May/June, 1981; its findings are included in this part of the report. Country social and economic data are given in Annex 1. A. Long-term Trends and Development Strategy 3. Over the past three decades, Romania has pursued a development strategy designed to industrialize a primarily agrarian economy. The main features of this strategy have been (a) a high rate of investment; (b) development of a broad industrial base, with priority given to heavy industry; (c) development of local natural resources, including the reorganization and modernization of agriculture; (d) balanced regional distribution of production and incomes; and (e) training of a skilled labor force. This strategy has been carried out through a system of comprehensive central planning and management, guided by party and government authorities. 4. Romania's economic development since 1950 has been impressive, characterized by rapid economic growth and considerable structural change. According to official statistics, national income has grown in real terms at an annual average rate of about 9 percent. Per capita GNP in 1980 is estimated to have been $2,340. Investment has grown at even higher rates than national income, as a result of which the share of gross investment in GNP had risen to about 34 percent in 1980. Industry, which grew at 11 percent per annum over 1970-1980, has been the driving force of economic growth, receiving around 50 percent of investment, most of which has been allocated to the capital goods industry. As a result, industry has become the leading sector, accounting in 1980 for about 62 percent of national income and for 36 percent of the labor force, compared with agriculture's 12 percent share of national income and 29 percent of the labor force. With the transfer of labor from agriculture to industry, the population has become increasingly urbanized. Standards of living have increased substantially, partly because of the growth of personal incomes and partly because of provision through the state budget of expanded and improved education, medical services, housing and social expenditures of other kinds. Furthermore, Romania's integration into the world economy has increased, as the level of trade has grown and its composition altered.  -2 B. Recent Economic Developments 5. During the last plan period (1976-80), the expansion of the Romanian economy slowed perceptibly. The average annual rate of national income growth of 7.2 percent was below that of the previous plan period (11.3 percent), and growth decelerated, falling from 11.2 percent in 1976 to 2.8 percent in 1980. National income growth in 1981 is estimated to have been still lower, at 2.1 percent. 1/ These changes reflect the emergence of a number of internal and external constraints, notably the pace at which improvements in productivity and efficiency can be attained; the ability of the economy to bring new capacity into operation as planned and a successively growing shortage of foreign exchange, which in late 1981 developed into an acute liquidity crisis. It should perhaps be noted that the very poor agricultural outturn both in 1980 and 1981 contributed significantly to the low growth rates recorded for national income in these years. 6. Industry continued to be the leading sector of the economy. However, the growth of gross industrial production also slowed down from an average of 12 percent per annum during 1976 and 1977, to 6.5 percent in 1980. As in the past, the growth of capital goods production exceeded that of consumer goods and the fastest growing subsector was machine-building. The need to adjust to the very tight foreign exchange constraint affected industrial production significantly in 1981. As a result, industrial output grew by only 2.6 percent in 1981. Gross agricultural production grew at a respectable average rate of 6.1 percent during the plan period 1976 to 1980 2/, displaying however, large annual variations due to changing weather conditions. in particular, in 1980 gross agricultural production fell by about 5 percent. Preliminary information indicate a further decrease by 0.9 percent in agricultural output in 1981. 7. As elsewhere, energy has become a critical sector for the Romanian economy. In the aftermath of the 1973 fuel price increase, an emergency decree was issued, fostering domestic energy production and imposing cuts and stringent restrictions on industrial energy consumption. These steps were followed by further measures in 1977 and 1979, designed to conserve domestic oil and gas resources and expand use of domestic coal and hydropower resources. To the same end, energy prices for both consumers and enterprises have been increased significantly in recent years. Total domestic primary energy production was virtually unchanged between 1975 and 1980; increases in production of natural gas, coal and hydroelectric power compensated for a 20% reduction in petroleum production. Primary energy imports (oil, coal and natural gas) increased 2.5 times. This, together with the increased international price of oil, has been the main reason for the deterioration in * the foreign trade balance (see paragraph 10 below). 8. During the plan period 1976-80 investment fell about 7 percent short of planned levels. The shortfalls occurred chiefly in industry where the planned annual growth rate of investments of over 20 percent could not be met, partly because of the diversion of resources in 1977 to the repair of earthquake damage. Industrial investment, in fact, grew by 11 percent a 1/ Data for 1981 are preliminary. 2/ Annual average growth rate for the whole plan period compared with annual average for the previous (1971-1975) plan period.  - 3 - year--in itself a very respectable achievement. The shortfall in investment in 1976-1980 was due mainly to domestic supply-related factors, in particular, capacity constraints of design institutes and, in the construction sector, shortfalls in the production of construction materials and production delays for domestically produced equipment. In contrast, the sharp reduction in investment in 1981, 7.3 percent according to preliminary estimates, is explained by restrictive measures made necessary by the difficult external situation. 9. Changes in the level and distribution of employment accompanied the growth and structural change of production. The total labor force increased by only 0.4 percent per year during 1976-80, but large intersectoral shifts in the labor force continued. During the five year period, the agricultural labor force fell from 38 percent to 29 percent of the total. The outflow from agriculture, which is determined chiefly by the needs of non-agriculture sectors rather than the ability of agriculture to compensate for the loss through mechanization, h.s led to seasonal labor shortages; recourse has been necessary to students and other groups to meet short term labor needs. The Government recognizes that the transfer of labor has to slow down to avoid adverse effects on agriculture output, and is thus giving even greater emphasis to increases in labor productivity. C. External Trade and Foreign Borrowing 10. In foreign trade, developments in the 1976-1980 plan period have been substantially different from and decidedly less favorable than those planned. The five-year plan envisaged growth rates of 13 percent per annum for imports and 18 percent for exports in real terms, aiming at a trade surplus which would allow the country to repay some of its foreign debt. During the 1976-1980 plan period, in fact, imports is estimated to have increased at an annual average rate of 8.8 percent and exports of 5.3 percent in constant prices. This resulted in a sharply growing trade deficit which in 1980 reached $1.6 billion, virtually all of it in the convertible currency area. On the import side, the deteriorating trade balance reflects rapidly rising international prices, especially for petroleum. Export growth was unable to keep pace with import requirements, partly because of less favorable price movements in Romania's principal export markets. The insufficient growth of exports is also explained by the vulnerability of Romanian exports to import demand fluctuations and import policies of the receiving countries, and to difficulties in meeting design and quality standards and establishing marketing policies essential to extend the foothold in highly competitive product markets. Developments in 1981 represent a sharp break with earlier trends. Imports from the convertible currency area were reduced drastically by sharp reductions in investments. As a consequence, the trade balance improved significantly, resulting in a slight surplus of about $0.1 billion in 1981. 11. The trade gaps together with rising interest payments led to a current account deficit in convertible currencies of $2.4 billion in 1980 and about $0.8 billion in 1981. The deficit has been financed through increased capital inflows, with total medium and long-term debts rising from $2.8 billion in 1975 to about $7.3 billion at the end of 1980 and about $8.0 billion by end 1981. Most of the inflows have been suppliers credits and  -4- eurocurrency borrowings. The scale of term borrowing available to Romania has not been sufficient, however, to finance the current account deficit fully and the Government had to resort to substantial short-term borrowing between 1977 and 1980. The net inflow of short-term capital in convertible currencies was particularly large in 1979, $813 million, and by the end of 1980, outstanding short-term debt had increased to $2.1 billion. This adversely affected the maturity profile of outstanding debt. D. Development Prospects 12. The Five-Year Plan for 1981-85 was approved by the National Assembly on July 2, 1981. The new plan gives priority to the completion of ongoing projects. This is reflected in the new investment law, published in December 1980, which includes measures designed to speed up project implementation. Production gains will come mainly from these projects as they come on stream, and from a generally higher utilization of existing capacities. Investment is thus planned to grow at lower rates than production. Overall growth targets are, however, lower than the levels actually achieved in the preceding plan period. 13. Special emphasis is placed on narrowing the energy gap through rapid development of domestic resources and through further savings in energy consumption. The plan envisages: (i) stabilizing oil production at the level of 13 million tons per year and natural gas at approximately the 1980 level; (ii) more than doubling coal production between 1980 and 1985; (iii) installing additional hydroelectric capacity for 2,500 MW. The implementation of the above program would result in an increase in domestic primary energy production of the order of 25 percent above the 1980 level. It would require successful implementation of the enhanced recovery program in oil production, some success in oil exploration and a massive mobilization of technical and manpower resources for coal production. Energy savings are to be achieved mainly by giving more emphasis to less energy intensive investments together with retrofitting and other measures to save energy in existing plants. 14. In the manufacturing sector priorities will shift from basic products such as steel or bulk chemicals for which adequate capacities already exist or will come on stream in the next few years, to more sophisticated goods including electronic equipment, special-purpose machine tools, specialty steels and other high technology products. Light industry including food processing, will continue to expand. A growing share of industrial production is planned to be exported. Local industries are expected to manufacture most of the capital goods required for the investment programs. 15. While industrialization remains the primary objective of the plan, agriculture will receive greater emphasis than in the past. The share of total investment for the agricultural sector will, however, be somewhat lower than in the previous plan period. Agricultural investment will shift toward increased mechanization, drainage and higher fertilizer application as the principal means of increasing crop yields. With an improved feed base, livestock production is also planned to increase. Gross agricultural production is expected to grow at an annual average rate of 4.5-5.0 percent over the plan period, lower than the actual growth (6.1 percent) during the  previous plan period. The additional output from agriculture would be partly exported but would also allow higher consumption levels at home. 16. The strategy of the plan, which responds well to Romania's economic challenges, is also reflected in the sectoral composition of the investment program which gives greater emphasis to energy production and less to heavy industry than realized in the last plan period. Total real capital expenditure is planned to grow by only 5.2 percent per year in 1981-1985 compared with an achieved growth rate of 10.9 percent in 1976-1980. About 17 percent of total investment in 1981-1985 is planned to go to the energy sector compared with about 12 percent in the previous plan; the volume of investment in energy will be about 85 percent higher than during the previous plan. Investment in machine building is expected to grow little, and the metallurgy sector will actually invest less than during 1976-80 since substantial additions to capacity were initiated during the previous plan. Moderate increases in investment are contemplated for agriculture, transport and housing. However, provisions in the annual plans for 1981 and 1982 indicate that investments in agriculture will get a significantly higher priority than indicated by the five-year plan. 17. Another major element of the Government's strategy to eliminate present imbalances in the economy is an exchange rate and price reform, which is designed to bring the structure of domestic prices into greater conformity with prices on world markets. A first step in this direction was taken at the beginning of 1981 when the exchange equalization fund was abolished and a limited number of discrete exchange rates were established for foreign trade. The immediate results of these reforms were a doubling of producer prices for energy and an overall increase in industrial producer prices of about 13 percent, taking into account both the increases in energy prices and their effect on the prices of downstream products. These changes were followed by an adjustment of retail prices by 11.2 percent at the beginning of 1982. Additional steps to reduce the number of discrete exchange rates and their spread were taken at beginning of 1982 and consequent changes in producer prices are in the process of being implemented. Further exchange rate and price adjustments are expected in 1983 and 1984. By bringing domestic prices more into line with world market prices, many previously unprofitable activities - especially in energy and raw material production - will again become profitable, thereby reducing the need for budget subsidies and encouraging the expansion of production and economizing on use of inputs. The simplification of the exchange rate system will allow world prices to be reflected more directly to users of imports and producers of exports. The closer alignment of domestic prices with relative resource costs as expressed in world market prices, should improve the general efficiency of resource allocation, especially since profitability affects investment proposals made by enterprises during plan formulation and, conveys information to the central planners about the relative efficiency of different enterprises, investments, and mixes of inputs and outputs. E. Creditworthiness 18. With the large increase in the current account deficit and the associated increases in external borrowing described in paragraphs 10 and 11 above, debt service payments in convertible currencies (including interest on  -6- short-term credits) rose to $2.22 billion in 1981 or the equivalent of 27.5 percent of gross convertible exchange earnings, increasing from 20.5 percent in 1979 and 23.5 percent in 1980. The deterioration of the current account balance up until the end of 1980, and the more negative evaluation of Eastern European countries in general as borrowers on the international capital markets, have recently led individual bankers and suppliers, including Romania's traditional banking and trading counterparts in the industrialized countries, to reduce their exposure by curtailing short-term credit lines to Romania. The unexpected withdrawal of short term credits and the lack of alternative financing has created arrears to suppliers and on bankers short-term credit lines. Following these developments, the Romanian authorities instituted proceedings for a rescheduling of debts due in 1982, and these proceedings are underway. Despite these short-term liquidity problems, Romania's basic external position in the longer term looks more sound. The exchange and price reforms described in paragraph 17 above will help to contain future deficits and to keep the debt service burden manageable. The reform is supported by a three year stand-by agreement with the IMF. Under this the Fund is prepared to lend up to SDR 1,102.5 million ($1,356 million); part of these funds would be used to consolidate short-term debts and part to build up the foreign exchange reserves. The program called for a reduction of the convertible current account deficit to $1.8 billion in 1981 with further reductions in 1982 and 1983. Recent estimates indicate that the actual deficit in 1981 was reduced significantly to only slightly above $0.8 billion with a continued improvement expected in 1982. As part of the program, the rate of growth of domestic expenditure, especially on investment, will be sharply reduced compared with the past. The measures associated with the price and exchange reform and possible future steps are aimed at enhancing exports and economizing on the use of imported inputs and on keeping the country's debt burden within manageable limits, thus preserving its creditworthiness for medium-term and long-term borrowing. PART II. BANK GROUP OPERATIONS IN ROMANIA 19. The proposed loan would bring total Bank commitments to Romania to $2,184.1 million for 33 loans in agriculture, industry, power and transport. Initially slow Bank loan disbursements have improved considerably since 1976, and the overall disbursement record for Romania is one of the best among the Bank's active borrowers. Annex II contains a summary statement of Bank loans to Romania and notes on the execution of ongoing projects as of March 31, 1982. 20. Foreign exchange, especially in convertible currencies, continues to be a major constraint. It remains one of the major objectives of Bank lending to help alleviate the country's shortage of foreign exchange by providing long-term external capital and by financing projects which will expand foreign exchange earnings or savings. The Bank has also assisted the Government to mobilize cofinancing for appropriate projects. The Bank helped to attract foreign commercial banks to provide $100 million cofinancing in August 1979 for the Second Livestock Project for which a Bank loan of $75 million was made in April 1979. Also, syndicated cofinancing loans of $00 million in total were concluded for the Mostistea and Calmatui Irrigation and Drainage Project for which a Bank loan of $70 million was made in April 1979 and the Third Livestock Project for which a Bank loan of $85 million was made in January  1980. More recently, another $200 million syndicated cofinancing loan from commercial banks was concluded in January 1981 for the Danube-Black Sea Canal project for which a Bank loan of $100 million was approved in April 1980. Through their contacts and subsequent negotiations with commercial banks, the Romanian authorities now appear convinced of the positive value of cofinancing in the form of financial credits, and have indicated their intention to seek similar arrangements for future Bank assisted projects. 21. Bank lending also aims at supporting the steps being taken by the Government to introduce new industrial technologies, to improve the quality of products and production efficiency, to reduce production costs and to provide for necessary electric power development. Marketing, especially for export goods, is also emphasized. Special attention is given to agriculture where production is still unnecessarily dependent upon weather and where productivity levels are still comparatively low. A number of further loans are under consideration, including loans for industry, power, regional agricultural development, drainage and land reclamation, and port construction. 22. In addition to lending, the Bank (through EDI) has assisted Romania by conducting training courses on economic and financial evaluation and methods of analysis in transport and industry. About 240 Romanian officials have attended these courses, starting with an industrial projects course in Belgrade in 1973 and in Bucharest where the courses have been held annually from 1975 to 1980 in collaboration with a Romanian academic institution. The methodologies taught in these courses are becoming more widely known in Romania and are expected for some projects to begin to supplement the methodology normally used by the Romanian planning authorities. 23. The projects, for which assistance has been committed or is being considered, represent only a small portion of Romania's total need for external financing. However, they will provide a substantial net addition to the inflow of convertible currency, and are helping to set a pattern for obtaining longer-term convertible finance from other sources. The disbursed debt outstanding to the Bank constituted 11.2 percent of Romania's total convertible currency debt at the end of 1981; the Bank's share in Romania's debt service payments in convertible currencies in 1981 was 5.1 percent. PART III. PETROLEUM SECTOR Background 24. Romania's energy situation deteriorated considerably in the last decade as the country's need for energy outgrew its domestic supply capacity. The increasing demand for energy was compounded by a sharp decline in domestic oil production since the mid-seventies, as well as by substantial shortfalls in targetted production of solid fuels, particularly lignite. Romania is one of the oldest oil-producing countries in the world and one of the largest producers of natural gas in Europe. Nevertheless, it became a net energy importer in 1973 and a net oil importer in 1976, and will continue to be so through the 1980s. Net imports of energy in 1980 supplied some 20 percent of Romania's domestic energy needs, while the oil import bill reached nearly $2.0 billion, seriously draining the nation's foreign exchange resources. Under  -8- presently practiced recovery methods, production from Romania's existing oil fields (about 12 million tons in 1980) could be expected to decline by a further 35 percent over the period 1980-85. However, the large investments in advanced enhanced oil recovery (EOR) methods in these fields as well as increased exploration activities, planned as part of the present Five-Year Plan, could potentially slow this otherwise rapid decline. Increasing energy production from non-petroleum resources, changing the structure of energy use, and implementing effective conservation measures are further means the Government plans to use to move the nation toward greater self-sufficiency in energy. Energy Context 25. Consumption. The consumption of primary energy in Romania increased nearly four-fold since 1960 to about 66 million tons of oil equivalent (Toe) in 1980, and is planned to grow by an additional 15 million Toe by 1985. Closely linked with the requirements of the national industrialization and development effort, but offset in part by energy conservation initiatives, growth in energy consumption in Romania has slowed to an average annual rate of about 4.5 percent during 1976-80, compared with a rate of over 8 percent during the sixties. 26. Per capita consumption of primary energy in Romania today, at about 3.0 Toe, is still below that for Eastern and Western Europe (3.9 and 3.1 Toe in 1978). However, the intensity of energy use at 1.3 Toe per $1000 of GNP is higher than averages for Eastern and Western Europe (1.1 and 0.5 Toe in 1978). The energy-intensive nature of the Romanian and Eastern European ecoriomies sLems in part from the relatively greater importance of the industrial sectors in these countries (i.e., closer to 60 percent of GNP, compared with 30-40 percent in Western Europe), arising from the priority given to industry's development, particularly heavy industry, since World War II. Industry accounts for some 55-60 percent of primary energy use in Romania, thermal power production 25 percent, transport less than 5 percent, and the commercial, services, agricultural, and residential sectors the remaining 10-15 percent. This structure of energy consumption is somewhat distorted by Romania's method of reporting energy use on a delivery rather than final use basis (e.g., energy reported as consumed by transport sector is only that directly used by public and commercially-hired transport units). 27. Domestic Energy Resources. Domestic production of primary energy has stagnated around 50 million Toe since 1975, while the current Five-Year Plan shows an optimistic increase in production to nearly 66 million Toe by 1985. Petroleum constitutes 74 percent of the primary energy used in Romania today, coal, lignite and related fuels 20 percent, hydropower 4 percent, and wood and other non-commercial fuels 2 percent. Given its declining oil production, however, Romania has already begun to adjust its energy supply toward solid fuels (e.g., lignite), hydropower, nuclear power, and non-conventional sources, with a target of reducing dependence on petroleum to about 63 percent by 1985. 28. Coal resources are limited; the bituminous coal, mostly found in southeastern Romania, has a relatively low calorific value and is used principally to supply two thermal power plants, while most of the coking coal  -9- as well as coke for the metallurgical industry is imported. Lignite and brown coal resources are more substantial, with deposits distributed throughout the country although many are not commercially exploitable because of thin seams and complex geology. An estimated 90 percent of the lignite reserves are located in Oltenia in southwest Romania. Being of very low calorific value, exploitation of deposits is largely for use in power plants nearby; production of lignite for this purpose is to increase substantially (nearly 2.7 times by 1985), and production of an even lower quality fuel, bituminous shale, for the same use is also planned. The country's hydropower potential is presently about one-third developed, and is expected to reach nearly 50 percent development by 1985 and full development by year 2000. Construction of a 660 MW nuclear power plant, the first of four units, has also begun but commercial operation is not expected until 1987. Other energy resources, in use or undergoing research/development, include wood, peat, maize stalks, corn cobs and other agricultural by-products, geothermal potential, solar, wind and wave energy. 29. Energy Policy and the Five-Year Plan. As early as 1973, after the first oil crisis, Romania responded by issuing an emergency decree which fostered domestic energy production and imposed cuts and stringent restrictions on energy consumption in each sector of the economy. These steps were reinforced by further energy conservation and diversification measures in 1977-80. In the face of an increasing energy deficit, the Government adopted in November 1979 an energy research and development strategy for the period 1981-2000 based on the premise that Romania should regain energy self-sufficiency by 1990. The plan calls for: (i) increasing production and use of domestic non-petroleum energy resources, particularly lignite, bituminous shale, hydropower, nuclear power, and non-conventional sources; (ii) emphasizing energy conservation, particularly by reducing industry's unit energy consumption; and (iii) stabilizing oil and gas production at levels which ensure minimum use of petroleum as fuel, while intensifying geological exploration and enhanced oil recovery to arrest the decline in recoverable reserves. 30. The overall energy strategy of the Romanians appears for the most part to be well-founded, albeit overly ambitious as detailed in the 1981-85 Plan. Particularly noteworthy is the shift of primary energy supply toward solid fuels, primarily lignite; with most of the adjustment in the power sector, the share of solid fuels in power generation is planned to increase from 26 percent in 1980 to 47 percent by 1985 while the share of oil and gas drops from 52 to 29 percent. New coal/lignite/shale mining-cum-thermal power plant projects are invariably capital intensive, complex, time consuming, and prone to delays, as demonstrated by past experience in Romania when the 1980 target for lignite production was less than 60 percent accomplished. Shortfalls in overall domestic energy production can, therefore, be expected in the projected 66 million Toe for 1985, particularly of the solid fuels but also of oil. At the same time, demand for primary energy can also be expected to fall somewhat short of its 1985 Plan target of 81 million Toe due to slower economic growth than envisaged as well as improved energy efficiency in industry and additional conservation measures. Nevertheless, net energy imports can be expected in 1985 and would therefore continue to be a heavy drain on the country's foreign exchange resources. Alternatively, shortfalls  - 10 - in domestic supply might be filled by increased production of natural gas resulting in faster depletion of available reserves, or domestic consumption of energy might be curtailed potentially slowing economic growth; both means were employed during the 1976-80 Plan period to minimize energy imports. 31. Public consciousness of the current energy deficit in Romania is high. Energy use in the public sector, by far the major user, is controlled through physical allocations based on established norms and reinforced by financial penalties. The Government reports that it has exceeded its overall targets of a 20 percent reduction in average unit consumption of fuels and 12 percent in the case of electric energy over the 1976-80 Plan period. Romania's energy program to year 2000 calls for a further 40 percent reduction in industry's unit energy consumption. This is expected to include improvements in operations, equipment and technology, and longer term changes in industry configuration and technology, Even given past achievements, such targets may be attainable in some industries, particularly steel and chemicals, although it is doubtful whether an overall reduction of such magnitude is possible within the timeframe visualized. Moreover, our somewhat limited knowledge regarding reserves and sectoral consumption leaves some question concerning the Government's long-term policy of conserving petroleum, in particular natural gas, at the expense of developing less efficient and more costly energy sources. The Bank expects to continue to address these concerns in the course of future sector work and in preparing future projects (para. 44). Trends in Petroleum Supply and Demand 32. Romania has a history of over 120 years of petroleum exploration and production, with domestic oil and gas production presently supplying about 18 and 43 percent, respectively, of total consumption of primary energy (imported oil and gas supply an additional 11 and 2 percent). Annual production of petroleum peaked in 1976 at about 15 million tons of oil and 36 billion cubic meters of gas (29 million Toe). Oil production has since declined to 12 million tons in 1980. Since 1975 additions to reserves have not kept pace with the depletion rate and the bulk of production is from fields developed in the sixties and now undergoing extensive secondary recovery operations which have also peaked. Over 25 percent of current oil production is attributed to enhanced oil recovery. Natural gas production during the last five years, by contrast, has remained nearly constant at about 35 billion cubic meters per year. 33. The growth of oil consumption during the seventies, although somewhat sporadic, averaged nearly 8 percent per year for 1971-78, and has generally exceeded that of overall energy consumption. Largely as a result of stringent restrictions on both public and private use, consumption was cut back sharply in 1974 and has been held steady at around 19 million tons per year since 1978; it is expected to remain at or below this through 1985. Net oil imports which began in 1976 grew to 38 percent of domestic oil consumption by 1980. Meanwhile, exports of refined products, a profitable business for Romania for over 30 years, reached nearly 9 million tons in 1980. With the worldwide excess refining capacity and current depressed market for petroleum products, however, competition is intense and exports have become substantially less  - 11 - profitable. Given a refining capacity about 1.5 times its domestic requirements and with half of the refineries integrated with petrochemical complexes, a complete match of production with domestic demand is precluded, necessitating continuation of some product exports. 34. Romania is presently one of the largest users of natural gas in Europe. Following 15 years of rapid growth, domestic consumption of natural gas fluctuated around 35 billion cubic meters (28 million Toe) for the last five years. Although existing fields have a higher productive potential, current Government policy is to limit consumption, and hence production, of non-associated gas to conserve reserves for higher value-added use such as feedstock for petrochemicals. However, production has been allowed to expand as much as 10 percent over target during 1976-80 to offset coal/lignite and oil production shortfalls. While this may continue through 1985, imports which first began in 1979 are expected to grow by about one billion cubic meters by 1985 from 1.4 billion cubic meters (net) in 1980. Petroleum Resources 35. As of late 1980, cumulative production of oil and gas in Romania amounted to about 522 million tons and 468 billion cubic meters, respectively. While official estimates of remaining reserves are not publicly available information, Bank staff estimate that about 125 million tons of oil and 350-400 billion cubic meters of gas can be considered as recoverable under existing extraction methods. Such reserves would correspond to about 6 years of oil and about 10 years of gas supply in terms of present consumption levels. With the exception of small quantities of recent production from deep (3,500 to 8,000 meters) onshore wells, all production is from shallow onshore fields. 36. The shallow onshore areas have been extensively explored; deep onshore exploration as well as offshore exploration therefore offer the best hope of significant commercial petroleum discoveries in the future. Deep drilling is extremely difficult and time-consuming. To date, about 200 exploration and appraisal wells have been drilled with about one-third having oil and gas shows, although most of these have not yet been fully tested or confirmed. Only 3 or 4 deep reservoirs are currently in production. Offshore exploration in Romania's Black Sea shelf began in 1969 and about 15 promising structures have been identified. Of the three structures drilled starting in 1976, two have shown gas while the third has shown oil. However, technical difficulties have delayed testing and confirmation of this discovery although there are plans for drilling additional appraisal wells as well as for an extensive production test. Substantial production from deep onshore and offshore reservoirs will likely materialize only toward the end of the 1980s; for the medium term therefore, Romania must rely on EOR programs in its existing fields to slow the decline in oil production and increase recoverable reserves. 37. The Government estimates that with the existing oil extraction techniques in the country (mostly primary and secondary with a few reservoirs using advanced EOR methods), the average oil recovery from known reservoirs would be about 32 percent of the oil initially in place. It is intended to  - 12 - improve this to 37 percent by the mid-1980s and 40 percent by the 1990s through implementing several EOR programs. At present, there are two commercial scale in-situ combustion operations (including the largest in the world), one steam injection operation, and about 16 pilot-scale operations involving various advanced EOR methods in progress in Romania. Petroleum Investment Program 38. The 1981-85 Plan provides for about $0.4 billion to the Ministry of Geology for offshore petroleum exploration and about $3.6 billion to the Ministry of Petroleum for conventional exploration and development ($1.6 billion), EOR programs ($1.0 billion), and deep exploration and development ($1.0 billion). The EOR segment is about evenly divided between routine secondary recovery operations and 18 commercial and pilot scale advanced EOR projects, of which the proposed Videle/Balaria EOR project is the largest and most important. 39. Oil production under the Five-Year Plan is targetted to stabilize at about 13 million tons per year during 1981-85, and natural gas to be maintained at 35-36 billion cubic meters. Bank staff estimate that the targetted oil production plateau would be attained only in 1986, and the cumulative shortfall would be about 8 million tons relative to the Government's target. Estimated oil production in 1985 would be just over 12 million tons, with about 40 percent coming from the advanced EOR programs and new discoveries arising from Plan investments and 60 percent from current extraction techniques applied in existing fields. At the same time, the gas production target could be exceeded if necessary in that even assuming no major new gas discoveries, non-associated gas production (presently 80 percent of gas production) could be increased by as much as 15-20 percent by adding more production wells and some related compressor and pipeline facilities in existing fields. Petroleum Prices 40. The Romanian economic system relies primarily on physical norms and allocations to control the utilization and consumption of resources. Price therefore plays a minor role in resource allocation, and energy prices have traditionally been low reflecting the country's heretofore low cost of primary energy production. However, given its deteriorating energy situation, increasing cost of domestic energy production and high cost of imports, Romania has begun to use prices to complement physical allocations as a means to control energy use. Thus in 1979, retail prices for fuels, electricity, and heat were increased with progressive tariff structures. In 1981, an economy-wide price resetting was implemented with an overall increase in industrial producer prices (i.e., prices received by an enterprise for its product) of 13.0 percent, including roughly a doubling of crude oil and petroleum product prices. While producer prices for domestic crude oil, at an average of $45 per ton, are still well below the price of imported crude ($265/ton), petroleum product consumer prices in Romania appear to be less than 10 percent below the average of their border prices (about $251/ton). However, there is a wide variation in prices among various petroleum products and between industrial and individual consumers. With the exception of gasoil  - 13 - and light fuel oil for heating, retail prices (i.e., to individual consumers) of major petroleum products are well above their border prices, and energy consumption by this category of users is very low (less than 15 percent). The bulk of energy and petroleum consumption is by the public or industrial sector where the domestic mixed-ton price for petroleum products (about $210/ton) is about 20 percent below the average of their border prices (about $251/ton), primarily because of the relatively low public sector prices for the middle and heavy distillates (e.g., fuel oils). The public sector price for natural gas ($16.70/1000 cubic meters as fuel and $5.30 as feedstock), which is mostly used as industrial fuel and hence can be substituted by fuel oil, is also notably low compared to its border price ($159/1000 cubic meters estimated in fuel oil equivalent terms). The above discussion of relative prices of petroleum products is based on an exchange rate of LEI ll/$1 rather than Romania's official trading rate of LEI 15/$l. These prices, in turn, are based on an imported crude oil price converted at LEI 10/$1. This represents current practice in Romania and suggests that crude oil imports are subsidized from the State Budget. However, since the January 1981 price resetting, the revenues collected from domestic sales as well as from exporting petroleum products at an appreciated exchange rate should largely offset this State subsidy. 41. The substantial increase in producer prices effected in 1981, along with the abolition of the equalization fund and simplification of the exchange rate system, was only a first step in Romania's medium-term stabilization program (para. 17). A major element of this program is an exchange rate and price reform designed to more fully reflect the cost of imported components in the structure of domestic prices through eventual unification of the exchange rate which would result in an elimination of State subsidies. In the domain of energy prices, it is expected that the Government will apply the official trading rate to crude oil imports by the end of the standby period (mid-1984); this would bring the domestic prices of petroleum products closer to world prices. The resetting and restructuring of retail prices scheduled for 1982 to take into account the recent changes in producer prices has already begun; for example, gasoline prices have been increased 20 percent and diesel fuel by 75 percent. Producer prices are also in the process of being further increased, retroactive to January 1, 1982, but after the sizeable increases in fuel prices in 1981, the major emphasis is expected to be on the relatively lower priced middle and heavy distillates and natural gas. At the same time the exchange rate for crude oil imports and petroleum products exports is expected to be a uniform LEI 12/$l. The progress of the Romanians with respect to the quantitative performance criteria under the first year of their program with the IMF has been encouraging and is expected to continue into the second and third year. The details of the annual programs to be implemented for 1983 and beyond are to be agreed between the Romanian authorities and the IMF; the Bank is cooperating with the IMF in this area. The Romanian Petroleum Industry 42. The main operations of the petroleum industry are organized under three ministries - petroleum, geology, and chemical industry. The Ministry- of Petroleum is responsible for onshore exploration, development, and production of oil and gas, as well as the operation of petroleum pipelines. The Ministry of Geology is responsible for offshore oil and gas exploration and all  -14 - exploratory works for minerals and solid fuels. Finally, the Ministry of Chemical Industry is responsible for refinery and petrochemical operations as well as marketing and distribution of petroleum products. Under the Ministry of Petroleum is a network of semi-autonomous operating units called trusts, centrals, and enterprises reporting to one of two Deputy Ministers. The main elements of this network are: six drilling and extraction trusts which operate the oil fields; one central which operates the non-associated gas fields; one research, engineering, and design institute (ICPPG) for handling all oil and gas field projects; and one enterprise (ROMPETROL) which 4 undertakes foreign contracts for technical services and erection/construction agreements in all facets of petroleum exploration, production and transport. Overall, about 100,000 people are directly employed under the Ministry of Petroleum. 43. Over the years, Romania has developed a commendable technology and equipment building capacity for the petroleum industry especially for standard onshore operations such as the proposed project. Romanian oil field equipment ranges from tubular goods to seismic and some sophisticated laboratory equipment. While equipment production is mostly for domestic requirements, exports of these products have grown rapidly during the last decade but export markets are beginning to be constrained by quality and lack of up-to-date technology in some important equipment categories (e.g. deep and off-shore drilling). This is due to the exclusive reliance on the development of local technology and equipment and from limited contact with the international oil industry. This has restrained the industry's development in certain special areas such as deep drilling and offshore exploration where the country could benefit substantially from foreign technology, equipment, and experience. Bank Lending Strategy and Role in the Sector 44. The Bank's lending for energy consists of four loans in the power sector: two for thermal power projects (Loan Nos. 1028-RO of 1974 and 1652-RO of 1979); one for a hydropower project (Loan No. 1242-RO of 1976); and another to finance part of the 1980-83 investments in the power sector (Loan No. 1936-RO of 1981). Lending commitments under these four loans amount to $305 million, of which about $236 million have been disbursed as of March 31, 1982. Although some technical problems and implementation delays have been encountered, overall performance under these loans has been satisfactory. The proposed Videle/Balaria EOR Project would be the Bank's first in the petroleum sector. In addition, an energy conservation project aimed at equipment and technology improvements in the metallurgical industry is being considered, and the Government has requested Bank financing for a second time-slice of power sector investments in the current Plan. Finally, an energy sector survey is being planned for later in 1982 which would integrate the Bank's knowledge of the various energy subsectors, provide an opportunity to review the developments and prospects for the entire energy sector, and examine the linkages with the overall macro-economic framework. 45. The primary rationale for Bank involvement in the petroleum sector lies in improving the quality and efficiency of project preparation and implementation activities of an experienced and capable, but nevertheless ingrown, petroleum industry. While the equipment and materials which will be  - 15 - used in the project are rather simple and quite standard for the oil industry, the technical and economic success of the project is critically dependent on the way in which these tools are applied and the EOR process is implemented, monitored and controlled. Therefore, during preparation Bank engineering and geological staff have contributed substantively to improving the overall configuration and design of the project as well as bringing to the Romanians' attention the technical and economic considerations affecting project viability. The final project document prepared by the Romanians further benefitted from discussions with and recommendations of a joint Canadian- Romanian consulting team brought in, at the Bank's initiative, to review the project; particularly critical recommendations were those involving the phasing of project investments and operations and systemized monitoring of the ongoing process to improve project economics, reduce operating risks and optimize subsequent investments. Such cooperation is expected to continue throughout project implementation in the careful monitoring of the project both by the Romanians and the Bank. Given their collaboration with Institut Francais du Petrole in the area of enhanced oil recovery since 1969 and fruitful exchange with consultants under the proposed project, we will further encourage the Romanians to continue to seek foreign expertise and technical cooperation especially in those areas such as deep drilling and offshore exploration where their own industry's experience is more limited. PART IV. THE PROJECT 46. The Bank's involvement in the petroleum subsector was first evaluated by a mission in November 1980. Following identification in March 1981 and preappraisal in June 1981, the project was appraised in September/ October 1981. Negotiations were held in Washington in April 1982. The Romanian Delegation was headed by Mr. Gheorghe Popescu, President of the Investment Bank and included representatives from the Ministry of Petroleum and the Institute of Research and Design for Oil and Gas Production (ICPPG). A Staff Appraisal Report entitled "Videle/Balaria Enhanced Oil Recovery Project" No. 3745a-RO dated April 30, 1982 is being circulated separately to the Executive Directors. The main features of the project are mentioned in the Loan and Project Summary and in Annex III. A Map (IBRD No. 16066) of Romania showing the project area is attached. Project Objectives 47. Romania's major producing oil fields have long passed their peak productive years despite the extensive application of conventional secondary recovery techniques (i.e., water and gas injection). Although the country has an active exploration program, this is increasingly directed at the more expensive and time-consuming deep onshore exploration and offshore exploration in the Black Sea, and has been yielding low returns to date; new discoveries of oil are quite inadequate to offset the depletion of older fields. However, there is still considerable scope for increasing the proportion of oil recovered from known reservoirs by the application of more expensive modern enhanced oil recovery (EOR) techniques which have become economic after the large increases in oil prices in the mid-1970s. The application of modern EOR techniques is considered as offering the best possibility of slowing the relatively rapid decline of domestic oil production which is likely to continue if no action is taken.  - 16 - 48. The project's principal objective is to reverse the recent sharp decline in oil production at two important oil fields, Videle and Balaria, by introducing an advanced EOR technique, namely, in-situ combustion. This technique involves the injection of compressed air, followed by ignition of a small proportion, usually the heaviest fractions, of the oil in the reservoir. The combustion is sustained by continuous air injection. The heat generated reduces the viscosity of the oil near the combustion area, allowing it to flow toward the producing wells by the pressure of the combustion gases. A typical configuration involves one row of air injection wells behind the combustion front and two to four rows of production wells ahead of it. After the front passes the production wells they are converted to injection wells. Use of this technique is expected to result in increasing the ultimate oil recovery from about 15 percent under existing recovery techniques to about 39 percent of the oil initially in place in the reservoirs. Project Description 49. The project covers the 1982-86 portion of a long term EOR program for the Videle and Balaria oil fields situated about 45 km. West-Southwest of Bucharest. It consists of: (i) drilling of about 910 new wells for air injection and oil production; (ii) construction of 24 oil and gas separation centers each with capacity for collecting and separating the fluids and combustion gases from about 50 petroleum wells (nine of the separation centers will be equipped with water injection facilities); (iii) construction of one central oil treatment, storage and pumping facility for handling oil and oil-water emulsions, similar to the existing facility which will also be expanded; (iv) construction of one water treatment facility to treat water before reinjection into the reservoir; (v) construction of air injection facilities comprising five compressor stations; (vi) laying of approximately 1,300 kin. of pipelines and flow lines for air and water injection, gas supply and fluid collection and disposal; (vii) construction of power substations and distribution lines as well as treated water and steam supply facilities; (viii) construction of 50 km. of main and 70 km. of access roads and field offices and laboratories; (ix) laboratory and field monitoring instruments; and (x) engineering and technical services. 50. The Videle/Balaria long-term EOR program is of high priority to Romania and has received final ministerial approval. This approval commits the Government to undertake the entire EOR program according to the phasing of the investments as agreed with the Bank during appraisal. It would also cause the Bolintin Petroleum Trust (TPB) to upgrade the monitoring of the combustion process thereby allowing it to make rapid operating adjustments in response to the dynamic behavior of the reservoirs to optimize output. The Borrower 51. The Borrower of the proposed loan would be the Investment Bank (IB) which is the Government's specialized agency under the Ministry of Finance responsible for dealing with investments in all sectors of the economy, except agriculture and food processing. It has branch offices in all districts of the country and has the staff to review and appraise the technical and economic aspects of project proposals. The IB makes recommendations to the  - 17 - Council of State on major projects and their financing. All investment funds for an approved project are channelled through the IB which authorizes payments for work performed in accordance with the approved plan. It is the IB's responsibility to ensure that a project is executed according to the financial and technical data included in the final approval and its inspectors supervise projects to ensure progress according to the approved schedule. As the Government's channel for investment financing in all sectors except agriculture, the IB's primary source of funds is the State Budget; the Guarantee agreement, therefore, includes assurances that all necessary funds would be provided by the Guarantor for the implementation and operation of the proposed project. Project Cost and Financing 52. The total financing required for the project is estimated at $454.2 million including about $11 million for incremental working capital and about $1.5 million for the Front-End fee on the proposed Bank loan. The foreign exchange component is estimated at $163.1 million or 36 percent of the total financing required. Physical contingencies have been estimated at 15 percent for the air injection facilities and 10 percent for all other items. Price escalation provisions were calculated on the basis of price increases of 8.0 percent in 1982 and 1983, 7.5 percent in 1984, 7.0 percent in 1985 and 6 percent in 1986 for foreign exchange costs. For local currency costs the rates are 5.5 percent in 1982, 9.5 percent in 1983, 5.5 percent in 1984, 5.0 percent in 1985 and 4.5 percent in 1986. 53. The proposed Bank loan of $101.5 million represents 22 percent of the total funds required and 62 percent of the foreign exchange requirements. The Bolintin Petroleum Trust (TPB) will provide about $115.3 million equivalent (26 percent) from internally generated funds and the balance of $237.4 million (52 percent) would be provided by the Government from State funds. The Government has a program of borrowing from foreign commercial sources, but as a result of the current unfavorable market conditions, there is a hiatus in its foreign borrowing. Nevertheless, the Borrower has advised that when market conditions are favorable it intends to seek cofinancing for the project and to facilitate their borrowing abroad, the Bank would be prepared to include an appropriate linkage in the Loan Agreement. The proposed Bank loan would be made to the Investment Bank for a period of 15 years including three years of grace at an interest rate of 11.6 percent per year. The Investment Bank will relend the lei equivalent of the Bank loan to TPB with identical grace and maturity period and at an annual interest rate of one-half percentage point above the Bank's lending rate, as required by Romanian law. The Government, following Romanian practice, would bear the foreign exchange risk. Project Implementation 54. The project will be implemented by TPB over a period of about five years starting in early 1982. TPB employs about 10,700 people mostly distributed among seven semi-autonomous subsidiary enterprises. Four of these enterprises are engaged in extracting oil from about 65 oil reservoirs, while the other three provide services (e.g. drilling and maintenance) for the oil  - 18 - extraction enterprises as well as for other outside entities. One of the oil extraction enterprises is the Videle Enterprise, which operates the Videle and Balaria oil fields. In 1981, these two oil fields provided about 39 percent of the Videle Enterprise's crude oil production (1.16 million tons), while TPB altogether produced about 3 million tons of crude oil and 0.34 billion cubic meters of associated natural gas corresponding to about 25 percent and 1 percent, respectively, of the country's oil and gas production. 55. Project implementation will be supervised by IB with the participation of the Ministry of Petroleum including the Institute of Research and Design for Oil and Gas Production (ICPPG) (para. 42) which will also do the detailed engineering. The drilling of wells and installation of wellheads, manifolds and flow lines will be undertaken by the appropriate enterprises under TPB. Major surface installations, such as compressor stations, oil and gas separation centers, as well as oil and water treatment facilities will be built by the Oil Installation and Construction Trust, while the electrical works will be done by the Electrical Installations Enterprise acting as sub-contractor. Procurement for Bank-financed items will be undertaken by ROMPETROL (para. 42). 56. An important operational element of the project is the monitoring of the in-situ combustion process to optimize production and influence the design of subsequent phases of the project. A critical aspect for such monitoring is the logging and coring of key wells drilled under the project. Agreement was reached during negotiations that a selected number of oil wells at locations agreed with the Bank would be cored and logged by TPB and new wells would be correlated with the old wells through radioactive logging inside the casing using appropriate techniques and equipment in consultation with the Bank (Loan Agreement, Section 4.01(a)(ii)). 57. In the recent past there has been a general aeiay in the impie- mentation of projects in Romania. In order to bring implementation of Bank-assisted projects back on schedule, the Government has recently established a high level inter-ministerial committee which meets each quarter to review progress and where necessary take appropriate action. This arrangement is expected to reduce the risks of delays for this project. The Bolintin Petroleum Trust (TPB) - Financial Evaluation 58. Under existing Government policy, oil extraction trusts are required to earn during the current Five-Year Plan an average profit of about 7.5 percent over their costs from extraction activities. However, following Romanian practice, these trusts also provide housing and other social and cultural services to their employees. The costs of these services are not fully covered by the fees charged to the users. In addition, other service activities of the trusts such as drilling and maintenance are normally provided at a small profit or at cost. The average profit when measured against overall revenues would range between 4 and 6 percent per year. However, during 1979 and 1980 TPB incurred losses. This is because the price set for TPB's crude has not been increased as rapidly as the rise in its production costs which have gone up steadily due to its having to operate under increasingly difficult production conditions. The Government's new  - 19 - pricing policy introduced in 1981, however, is aimed at more frequent changes to reflect production costs and it is expected that in the future TPB's crude oil prices will be adjusted to enable it to earn the average profit rate. Consequently, TPB earned profits equivalent to about 8 percent of its revenues in 1981. To safeguard against a recurrence of the financial losses of the earlier years, agreement was reached during negotiations that all actions necessary would be taken to enable TPB to earn a reasonable profit in relation to total revenues so that such profits together with depreciation and reserve discovery charges would be sufficient to service TPB's debts and to finance a reasonable portion of its investments (Loan Agreement, Section 4.01 (a)(v)). 59. On the basis of the foregoing, TPB would be able to generate sufficient funds from its operations to enable it to service its debts and finance at least 30 percent of its investment requirements including the recurrent annual investments for the project beyond 1986. While the Government's crude oil pricing policy based on production costs is perhaps not fully satisfactory since it does not focus enough on the financial return on capital, the recent decision to ensure the average profit margin mentioned above is a move in the right direction and is satisfactory. Although prices of domestically produced crude is much lower than the international prices, the average mixed-ton price to the final users of petroleum products is set by the Government much closer to their border prices (para. 40). Audit 60. Agreement was reached at negotiations that the financial statements of the Investment Bank and TPB would be audited each year by the Ministry of Finance and furnished to the Bank within six months of the end of each fiscal year (Loan Agreement, Sections 6.02). Procurement and Disbursement 61. Procurement of equipment and materials valued at $94 million will be by International Competitive Bidding (ICB) in accordance with the Bank's guidelines, on the basis of a list of items agreed with the Borrower. The items have been grouped into major categories required for drilling and completion of wells and for the surface facilities, such as tubular goods, roller-bits and pumps. Unless the Bank otherwise agrees, bidders will be prequalified in accordance with criteria acceptable to the Bank. Qualified local suppliers will be allowed to participate in ICB with a 15 percent (or the import duty rate if lower) preference margin. The Bank will review all bidding and contract documents. Items valued up to $6.0 million would be procurred through limited international tendering with quotations obtained from at least three suppliers from three different countries. Such tendering will be restricted to items estimated to cost less than $300,000 equivalent and to items such as high pressure and temperature valves, control equipment, special packers and bottom-hole assemblies in limited international supply whose delivery periods are critical to the timely completion of the project. Given the standard nature of the equipment and materials, of which Romania has ample supply capacity and which it has been manufacturing for many years because of its early involvement in the petroleum sector, the transport advantage they have and the preference margin, it is expected that Romanian  - 20 - suppliers could win a high proportion of the internationally bid items. The Romanians are expected to be most competitive in tubular materials and least competitive in roller bits, pumps and the items to be procured through limited international tendering. 62. The proposed loan would be disbursed against 100 percent of foreign expenditures for imported goods and 100 percent of the local ex-factory price of locally supplied items. Environmental and Safety Considerations 63. The main sources of pollution are the oil well fluids (oil, water and combustion gases), and with the exception of the combustion gases, will be handled in a semi-enclosed system. The water will be treated and reinjected into the reservoirs. The combustion gases, mostly nitrogen (N2), carbon dioxide (CO2) and carbon monoxide (CO) with negligible hydrocarbon fumes due to the low gravity of the oil, will be vented to the atmosphere through 50-meter or taller stacks. Agreement was reached with the Borrower that TPB and ICPPG would take all steps necessary to ensure that concentration of CO and C02 gases in the project area would not exceed the average of 2.0 and 7,000 milligrams per cubic meter (mg/m3) over a twenty-four hour period and 6.0 and 10,000 mg/m3 during any thirty minute period (Loan Agreement, Section 4.01(a)(iii)). These are considered satisfactory safety levels. The in-situ combustion process does not present a safety hazard until the fire-front reaches a producing well. As a safety measure, all new wells will be cemented to the surface with heat-resistant cement, and the advance of the fire-front will be continuously monitored through periodic temperature surveys, and when the fire-front reaches a producing well, cooling water will be circulated inside the casing. This arrangement has proved to be adequate in other commercial and pilot tests using the in-situ combustion process in the country, as well as in the pilot tests in the Videle and Balaria fields. Project Justification and Risks 64. Enhanced oil recovery offers the most promising prospect to the Romanian petroleum industry for slowing production decline and stabilizing domestic supply in the medium term, given the modest expectations of production from new onshore developments over the same period. The primary alternatives, deep drilling and offshore exploration and development, have not yet established production potential and involve a high technical risk. With Romania's import deficit widening, all of the EOR investments included in the 1981-85 Plan appear prima facie to be economic, and the precise sequence of implementation is more a function of the state of preparation rather than the relative economic returns of these investments. Among these projects, the proposed Videle/Balaria project is the largest in terms of incremental oil production potential, as well as the most advanced in terms of project preparation. It is expected that a major portion of the surface facilities of the project would be commissioned by mid-1984, followed by substantive incremental production of crude oil beginning in 1985 and reaching an average incremental production plateau of 0.73 million tons per year by 1986. This corresponds to an ultimate recovery factor of about 39 percent of the oil initially in place compared to about 15 percent without the project. It would  - 21 - more than double the expected oil recovery from the Videle/Balaria fields and result in a total incremental production of about 30 million tons over the full 40-50 years of the program. The proposed incremental production, at full development in 1986, is expected to equal roughly 10 percent of the country's current net oil imports thereby saving some $200 million (1981 constant dollars) per year in foreign exchange. The proposed project has both a satisfactory economic return and an acceptable risk. 65. The economic analysis has been done on an incremental cost and benefit basis by comparing the cases with and without the project. All costs and benefits are in constant mid-1981 terms expressed as border values using the official trading rate of Lei 15 per US dollar. Because the Videle/Balaria crude oil is rather heavy, its economic value has been taken as $33 per barrel ($221 per ton) compared to a value of $36 per barrel which is the average price Romania pays for imports. The analysis assumes a 20-year productive life for the project investments and includes the recurrent annual capital expenditures of about $25 million after 1986 that would be required to maintain the incremental oil production. The main project benefits are due to lower unit operating costs as well as higher output levels compared to the case without the project. The economic rate of return of the project is about 29 percent. 66. There are inherent operating risks that exist in all EOR projects due to the heterogenous nature of petroleum reservoirs which introduces uncertainties in their performance and thus the prediction of operating results. In the case of in-situ combustion, the well spacing and pattern, air compression capacity and skill of the operators monitoring and controlling the combustion process are the most important operating factors affecting the technical risks of the project. Any deficiency in these aspects would be reflected in some combination of a need for additional wells or larger air compression requirements or a lower ultimate oil recovery factor. The physical contingencies for wells and air compressor capacity provided in the project design and cost estimate largely cover the first two of these risks, as based on actual results from the pilot tests and similar projects in the country. In addition, the twenty-year practical experience of the Romanians with the in-situ combustion process, their generally high level of technical competence in petroleum engineering and production as well as the monitoring program incorporated in the project design further reduce the technical risks to a relatively low level for a project of this type, especially with respect to the oil recovery factor. Project management risks, which would be reflected in substantial delays and cost overruns, also exist to some degree. Management risks primarily derive from the administrative and annual plan rigidities in the Romanian system which makes it difficult for the project managers to respond effectively to unforeseen events, particularly delays in the delivery of local equipment and materials. The Government's high level inter-ministerial committee established recently to follow-up progress of Bank-financed projects (para. 57) would reduce this type of risk. Sensitivity tests of the economic rate of return to account for these various risks indicate that in the worst case, characterized by one-year delay in production, increases in capital cost of 20 percent and production cost of 40 percent and ultimate oil recovery down by 10 percent, the return would be  - 22 - about 18 percent, while in the best case reflecting an increase of 28 percent in ultimate oil recovery plus 3 percent per year real increase in the price of oil it could be on the order of 40 percent. PART V. LEGAL INSTRUMENTS AND AUTHORITY 67. The draft Loan Agreement between the Bank and Banca de Investitii, the draft Guarantee Agreement between the Socialist Republic of Romania and the Bank, and the report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement are being distributed to the Executive Directors separately. PART VI. RECOMMENDATIONS 68. Features of the project of special interest are listed in Section III of Annex III. 69. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. 70. I recommend that the Executive Directors approve the proposed loan. A. W. Clausen President Attachments April 30, 1982  -23 ANNEX 1 Page 1 of 5 pages TABLE 3A ROMANIA - SOCIAL INDICATORS DATA SHEET ROMANIA REFERENCE GROUPS (WEIGHTED AVERAGES LAND AREA (THOUSAND SQ. KM.) - MOST RECENT ESTIMATE4A TOTAL 237.5 MOST RECENT MIDDLE INCOME INDUSTRIALIZED AGRICULTURAL 149.7 1960 /b 1970 /b ESTIMATE /b EUROPE MARKET ECONOMIES GNP PER CAPITA (US$) .. 480.0 1900.0 2609.1 9444.0 ENERGY CONSU1MPTION PER CAPITA (KILOGRAMS OF GOAL EQUIVALENT) 1468.8 3040.7 4810.0 2368.4 7896.6 POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (THOUSANDS) 18407.0 20361.0 22068.0 * URBAN POPULATION (PERCENT OF TOTAL) 34.1 40.8 47.1 53.2 76.4 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 25.6 STATIONARY POPULATION (MILLIONS) 29.0 YEAR STATIONARY POPULATION IS REACHED 2075 POPULATION DENSITY PER SQ. KM. 77.5 85.7 92.9 80.6 142.7 PER SQ. EM. AGRICULTURAL LAND 126.0 135.0 146.1 133.9 523.3 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 28.2 25.9 25.8 30.1 22.8 15-64 YRS. 65.1 65.5 64.3 61.5 65.6 65 YRS. AND ABOVE 6.7 8.6 9.9 8.3 11.6 POPULATION GROWTH RATE (PERCENT) TOTAL 1.2 1.0 0.9 1.5 0.8 URBAN 4.1 2.8 2.5 3.1 1.3 CRUDE BIRTH RATE (PER THOUSAND) 20.0 20.1 18.1 22.9 14.5 CRUDE DEATH RATE (PER THOUSAND) 9.0 9.9 9.4 9.1 9.5 GROSS REPRODUCTION RATE 1.2 1.3 1.2 1.6 0.9 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) USERS (PERCENT OF MARRIED WOMEN) .. .. FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71=100) 89.0 90.0 151.0 119.8 112.7 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 108.0 115.0 130.0 125.7 131.4 PROTEINS (GRAMS PER DAY) 86.0 90.0 103.0 92.5 98.1 OF WHICH ANIMAL AND PULSE 30.0 34.0 43.0 39.7 62.2 CHILD (AGES 1-4) MORTALITY RATE 3.8 2.5 1.3 3.4 0.6 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 65.5 67.8 71.0 68.9 73.8 INFANT MORTALITY RATE (PER THOUSAND) 75.7 49.4 31.4 25.2 12.9 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. .. URBAN .. .. RURAL .. .. ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. .. URBAN .. .. RURAL .. .. POPULATION PER PHYSICIAN 780.0/c 840.0/d 737.5 973.3 621.2 POPULATION PER NURSING PERSON 620.07 .. 638.0 896.6 217.4 POPULATION PER HOSPITAL RED TOTAL 130.0/c 120.0 108.7 262.3 119.4 URBAN 50.077 50.0 72.7 191.8 120.9 RURAL 620.Olc 770.0 816.7 ADMISSIONS PER HOSPITAL BED .. 23.0 .. 18.2 17.9 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL .. 3.2/e URBAN .. 2. 8/e RURAL .. 3.4/e . AVERAGE NUMBER OF PERSONS PER ROOM TOTAL .. 1.4/e URBAN .. 1.3/e RURAL .. 1. 4/e . ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL .. 49.0/e .. URBAN .. 86.0 ..o Rl'RAL .. 27.0/e ..  - 24 - ANNEX 1 TABLE 3A Page 2 of 5 pages ROMANIA - SOCIAL INDICATORS DATA SHEET ROKANIA REFERENCE GROUPS (WEIGHTED AVERtGES - MOST RECENT ESTIMATE)- MOST RECENT MIDDLE INCOME INDUSTRIALIZED 1960 /b 1970 /b ESTIMATE /b EUROPE MARKET ECONOMIES EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 98.0 112.0 106.0 105.9 99.6 MALE 101.0 111.0 109.0 109.6 102.1 FEMALE 95.0 113.0 103.0 102.2 101.8 SECONDARY: TOTAL 24.0 44.0 84.0 66.3 89.3 MALE 27.0 51.0 90.0 73.2 83.3 FEMALE 22.0 38.0 77.0 59.5 85.0 VOCATIONAL ENROL. (% OF SECONDARY) 54.0 58.0 84.0 28.4 18.1 PUPIL-TEACHER RATIO PRIMARY 25.0 21.0 23.0 26.8 21.2 SECONDARY 16.0 18.0 22.0 23.6 16.4 ADULT LITERACY RATE (PERCENT) 88.6/f *- 98.0/g 75.4 98.9 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION .. 2.2 .. 83.9 349.7 RADIO RECEIVERS PER THOUSAND POPULATION 120.0 151.0 142.8 181.6 1018.0 TV RECEIVERS PER THOUSAND POPULATION 3.0 72.9 146.0 131.1 400.1 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 147.0 168.1 171.4 123.8 336.7 CINEMA ANNUAL ATTENDANCE PER CAPITA 9.0 9.8 8.3 5.7 4.3 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 10405.1 11408.2 12084.4 FEMALE (PERCENT) 42.5 44.5 44.6 32.9 36.6 AGRICULTURE (PERCENT) 65.3 49.1 32.5 34.0 6.1 INDUSTRY (PERCENT) 15.1 23.1 33.5 28.7 37.7 PARTICIPATION RATE (PERCENT) TOTAL 56.5 56.0 54.8 42.3 45.7 MALE 64.5 63.3 61.5 56.5 58.9 FEMALE 48.4 49.0 48.2 28.5 33.0 ECONOMIC DEPENDENCY RATIO 0.6 0.6 0.7 0.9 0.8 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS .. HIGHEST 20 PERCENT OF HOUSEHOLDS .. LOWEST 20 PERCENT OF HOUSEHOLDS .. LOWEST 40 PERCENT OF HOUSEHOLDS .. POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. RURAL .. ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 394.0 RURAL .. .. 394.0 385.1 ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. RURAL .. Not available Not applicable. NOTES /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1976 and 1979. /c 1962; /d WHO estimates; /e 1966; /f 1956; /g 1975. * The updated 1980 GNP per capita and population estimates are $2340 (at 1978-1980 prices) and 22,268 thousands. May, 1981  - 25 - ANNEX 1 Page 3 of 5 pages DEFINITIONDS OF SOCIAL INDIlCATORS hone Although the aaae - drou freI ut. geeal.uge h otauhrt and.reia.ble, on should ae- be utri th- they ma otby tnr eiooallonorrbebcueo b eko sedandleed defiotirin.. end --ttPsa ted by diff-rere conties On telle-elg teda.The.es re us etle,ueu odeinb reso ond,td inan treds, cod the....neefee terteit eajr differences r t-t Obreeenc eurar llnssc.toneytnpfttsujtsoutyadIl eonoy rufinesett igroioaeeiondtstetateget of the ut jetsoeueney(eteep foe "Cpital hrlus Il thoyabrtas group. abet 'Mdl i-oae OtrP Afita .. end riddle- -asohatese heos hof.. stronger , oneIniorator etatlstoamen0thedtouror end t,fetrte grouye Toa--Tnt uftsee -oI.es..s hand nose and - lnlaRdscrf aror..l orildiddd y btrtepetitoumercIn_paa bd nulte by-en tofnsee.. s-nhoding Woed ..e.I.b Aclee d1-0-0 hot) 06.ednala 1treotteasn asaffn b fyita htt 1900. end 1000 data. nedioul~-b- - aesteser d,toso. cdnif_ er. ar,ibofe :I Iin- tstst E.1i..1. of ... ib.1 ..d..ocndeotdsliotcregeafIdhalfciiti-dFoeta-e afdllgnlt,yet-leu, neraral. gacoohydot.,-. n flru - ge 1h7nalte- Iaodra-i-hoartt -lnlotalo-rt..relho-p I -aermdtlonIeenityf T970tei P 197ano9 Mid-Yer (-hoserd) -dbiof JiI0 I lOIh1000fond 009 Ottl.. data, bonnets~~~~~~~~~~~di. Slo o-drfIot-ho. .. Ioson Is househldf-iltesi- aorban sd ath ENpheCNSPeoteinIOperoCAPTA of total)-atof ubrf tosel.y.ait hoshI ooet fegnso .n.I.iaalu so char liot, pi-ne among, Y ionokitetih, 1000..f end1otP. p 19000data,0the ho19eho- d forstatist h-itolf yunpdnseey..dr o- OnalfieArosnios teogsa-r ofrnoe e toon cocci ofe, n rara - . .1Prpojtniiot Md-. pataet.e.fo d.tatt rents ofuJmprier 60 of 70three 19e79euu HUSNGtuadyto instate fo etiiyrieesbn chess - or lercacnogfoisi ofbtteA urtut,, . t.. ura dott inerseo er en tfrtiit trends for proecio p1 yoso9a hu.e h nroldinet at tettnry ouain-oea onr ouato hr ie-o g-nc eoosTnit esoo totl u2 an fe u-rban, tonal sale eArdinnate the releosent enetol untro- .P1rependonto rate, sr' ecth gonesilt b arc hot P ud. untP foe d -ffrernlegeI of,pIuatoduost...; fee-.r by o-onIenssiret -ne Iy theI ....tooro. ppulaion tin ue- d- nrtant tiera auatn eromntsy aeK.00pte pront n the bueP a of th noeti hasteitif o the I I popuatio sic. oeppl.rehln0 ho h ofca oolae nent lerel rdueanloeeqairre a liahe fornyears opappeared tieiaty isnenetirn fsrnesionator-plto ntete b ea bteainaffplno peonie geosoalt , ooaioal orta e ecnu ntuttn2a ni only 1060. tOy sod.10 data Auoi- tatbt- ret t - -eos.adeonaoSno tdnsntniie Peotair-n Ass I,i _cusr frereet) -rCilren f.II-i years)I. norhn-age 15- _tiat ad t 1dtyleel Idi-ided by ruIher of1 tsae ar toth lenhn 1060.o.nrI l fr tgti.-sed lot data. udul linnedertat foredns fe 0 - -oterhteedflpelab Is toread afdori Peoulaion mnth tas Irsceot)- tta -I ...iot rates of- noe td sproenege o toardurit tp -inge 15 yess ed ace 'r. Tsar popasfions fo 1050-go lOg-t,Ibend 1h7--r-00. h,.1.i .. . TI- I--o-r~fiI1b.l.. Crd fei htefe banu) nol .oe.lb.a.y. to-hnd o el-.er.ern eatog lees 1 thansogh perons --oludes-abat-eec -ere a-ed po-alrson; i96O, 09000 sod 1000 dana nru. uo -hatoe ite.1,id . I,o h r,. hc .-idpd poplcen; 19 O iN, 97 en 00dda ra 1978s notgotrto putlyo yet thssd-1 - poultin - ne-de o-ln i 64yernenalrprduttir' p65niodcfnbsde-renIeeoee yre..sgntagi-yp-optefr- _rnn - tafee deaorsen essIIItbroyseleit .Pestleilannin-hntM nt.a(. donn-er1 feoseA) -. Ingnua rusher of eteepear TI eeite p. oer tousand. eA.otetpn ... 1- teonr for broaIdeati Flog Bit A IS-OY-dq-f.III-bit..bt ...do iTETi-tobe daly i i appersa leas foot I-.oleesseb.l ... n P 96no 0PedPodoeo per0 faiaflb te t- ne o e npn at7ua__leenaAnnua gtedeete aiste en-tae rte ubro Perilita surely of. nalnefies _eennto 197gemosf ompuid 17fInn a... fe-o- end1naslopd lib. nt oldn aueis,sudsn e enrgy qedsfnt f se oo .uppi.. o avaiabl f.ilouey peein oPi oo-ogt..o- populaionp of.. al pageIt. einiton1iod- eunoenisc pen nap. Anenlubta aonnlioe tonprot do-me-atic pedunin,t rorte tsn not . orasaInt ith, 100 an 1070 data.. n ff maote n rhooge to, snook Net mooln h enbludhan-ar fed d eede- r.endsItse)- esl br forteP as. e--ee_geo total -ebur fro- seD NDssr ciae yPCbsda haooic sd e oa ti ihr neT p_arcenta.i, fe of nasal I labor for ts; 060 100ad0Iaa Inip and For t nd n sin.ered-tainioraas,bdynigts,- age lonnnfecn ebtdnrtfiig onnune,~uagto and cn diortbunonPo popuaion n toig1 percent.' for eass on.en d-isniin , stnce gases pi eengedfitta lab-t frts -hi hp unsotid tevel; lOh-gd irooOdi aud 1000 danao.o 1000d and 1000 datar.'t. net` suppl yof fodttda. CNetsoppl n-f foodisr godefn en., chao,-- con..iln rae r cene e os,nas n esl aeefcsc atlonneof6.e.ao eIa....napele pee day and_191-1 1900 gen fsta n O 00nd 1000d -1Lb-F (t-.den. Ths E t ae o lepaeepti ar rolsepronse. ofebich10 crsa shuld b anist proein. hecaann,f rtflttie5age-se stecrureof th rapuat to, endtoograsscttd. Pee emitta oresi sof rein ran otna cod tuie- Protst pppy offoo d ricd ineisican plss o ras eeda; _b-h.) CfOp end 100 es. ICof OIdTI...UfIIo.br-Z-.t Chad ass -A bfralt tan fre.t.d ad -.,l. Atna dena - Per t-eosar it reoc e of. tr. en Inoe(ohi testen kind - trei.d. t rices tIesdyndrie Peon I -lifetbe;- b,tO o 1000 de-te of boosIaho.ds. enttf;191hOfUo Ind 1000 I II.~ni data, andF-1 should F.loIb he irerptofd no-looeideIhfcmriar Acesn Its ae firce ofd- .ig . c ua Ia- total abut d, ribdtotal - Lun f-rtoal auon tr tsasoie nor-food hnqoigsee tano sanertenppiy f AeoIude t daadsefnohoto orRu-tr..tad. r butunctnaitaa eiae fi. iatoI Pcrof In-1s Len,- fi-S$ pan96p0 a -97 urba a979 e eairnncdbhusthban -ios petcebsh tna, ort.ng..a dyssnitty..tls.. IAn.ryteafroor oaateise-btu rg etpt pernnag.. of t-Ob- npeniv p opolaniona .11-aoar _oareptir -t"n g- ..;, irtiy I r 'r-g7f tl b f I cons-ideet ablgaihnraoai -,ao 2~n1r..Ieceeo hnhue frrlaenln la,bP-dj onsmane foe hi gnat tactr of dtfoirg in uttrsteen. - resnbeacs cId P mp. thn Yb huenIe aood hers of the bosb old tRiaa.nrlnt afuAsln Tonten - oone dLevel freeene- 1-ut feell 5 oter needsll. ro -l.dbyUDp-i f i. Poo-t' .1 Aces fn ttet I-roa of r-rr o pr.ouiacia total, 2 IIhat and turld 19- 90 d17 .. h .b..d L' Ipercentages of thIr , I repat -e opl dion tropret. disp FOsal say Tid .... include1In 6 thrtldeFord and disposeS o1970o ndt out7 tIreatlot.of uma-eest "'Id fr.. ni-1. od p.1... in gr... F- d.y; 1961-65.197t0 tndtc 197n7sa aedPIoCOrE faSTRIBUTrION _~o of I-- In- (bbIh in -Ihtar loft Peelein tee1 hbsra ouaindcddhotra fpatltgoyi -cgadrsq datissaafr..aslifta-ltho. a96un1970Ity7ldenIt2elc, ....21.....- .... Poocletirn err tatnion Persen - Popueslot Iloidad by nuebee oO precegoih sass eod Peale grsd uate norase , pracrVouTAoneTeGROand  - 26 - ANNEX I Page 4 of 5 pages ECONOMIC INDICATORS NATIONAL INCOME IN 1981 1/ Average Annual Growth in volume (%) 1976- of which US$Mln. 19SQ 1976 1979 1980 1981 National Income 35,350 7.2 11.2 6.2 2.8 2.1 Gross Investment 13,900 10.9 8.5 4.1 3.1 -7.3 Gross National Saving 13,067 Current Account Balance -833 Export of Goods, NFS 13,492 5.3 14.7 -7.6 8.5 n.a. Imports of Goods, NFS 13,308 8.8 15.7 4.3 0.5 n.a. DUTPUT, EMPLOYMENT AND PRODUCTIVITY IN 1980 Net Value Added 1/ Labor Force 2/ N.V.A. Per Worker US$ Mln Z Mln Z US$ Z Agriculture 3,930 11.6 3.05 33.9 1,289 34.3 Industry 20,800 61.5 3.68 40.9 5,652 150.5 Construction 3,200 9.5 0.86 9.6 3,721 99.1 Others 5,870 17.4 1.4 15.6 4,193 111.6 Total/Average 33,800 100.0 9.0 100.0 3,756 100.0 GOVERNMENT FINANCE (in billions of lei) 1976 1977 1978 1979 1980 1981 Total Revenue 254.5 282.0 300.8 339.3 298.0 280.3 Total Expenditures 180.4 196.5 198.9 224.7 191.6 179.5 Current Surplus 74.1 85.5 101.9 114.6 106.4 100.8 Investment Expenditure 69.7 83.9 100.4 112.9 105.1 92.3 Overall Surplus 4.4 1.6 1.5 1.7 1.3 8.5 MONEY, CREDIT AND PRICES 1976 1977 1978 1979 1980 1981 Koney Supply (blns of lei, end of year) . . 85.6 87.6 110.6 n.a. Bank Credit to enterprises (blns of lei, end of year) . . 386.0 405.0 428.0 n.a. Retail Prices (1975 = 100) 100.6 101.2 102.8 105.0 106.6 110.3 1/ Social material production methodology, excluding depreciation and output of the non-productive sector. 2/ Excluding non-productive sectors. EMIDD April 23, 1982  - 27 - ANNEX I Page 5 of 5 pages BALANCE OF PAYMENTS (USg million) 1976 1977 1978 1979 1980 1981 MERCHANDISE EXPORTS, 1981 US$ Mln Exports of Goods, NFS 6,642 7,357 8,728 10,133 12,087 13,492 Capital Goods 3,660 29 Imports of Goods, NFS -6,540 -7,529 -9,319 -11,428 -13,730 13,308 Consumer Goods 1,980 16 Resource Gap 102 -172 -591 -1,295 -1,643 184 Foodstuffs 1,010 8 Interest Payments, net -118 -132 -168 -358 -777 -1,017 Intermediate Goods 3,350 26 Balance of Current Account -16 -304 -759 -1,653 -2,420 -833 Raw Materials 2,610 21 Industrial (2,170) (17) MLT Borrowing Agricultural (440) (4) Disbursements 712 861 1,174 2,065 2,805 2,160 12,610 100 Amortization -502 -562 -586 -809 -851 -1,133 Net 210 299 588 1,256 1,954 1,027 EXTERNAL DEBT, Dec. 31, 1981 US$Mln MLT Lending, net -392 -358 -346 -309 -181 -174 Convertible currencies 10,160 Short-term Borrowing, net 124 256 487 821 449 -1,385 Medium and long-term 7,694 SDR allocation - - - 33 33 32 Short-term 643 IMF credit 680 Use of IMF credit 181 38 -20 -8 52 290 Arrears 1,143 Payment Agreements 163 101 103 96 -47 -32 and IBEC Non-convertible currencies 386 Errors and Omissions - - 65 -77 - - Total 10,546 Change in Reserves 1/ -23 306 -120 -149 202 -81 = increase) DEBT SERVICE RATIO, 1981 % Oil and Products Exports 735 688 746 1,744 1,871 1,907 All Currencies: gross 2/ 16.6 Imports 717 875 1,219 2,051 3,818 3,370 All Currencies, net 3/ 13.9 Convertible Currencies, gross 4/ 27.5 IBRD LENDING, March 31, 1982 5/ us$ MI. Outstanding and disbursed 1,301.4 Undisbursed 686.7 Outstanding and undisbursed 1,987.6 1/ Includes foreign exchange and SDR holdings. 2/ Debt service payments for credits received only. 3/ Net of debt service payment receipts for credits extended. 4/ Debt service payments included in convertible currencies as a percentage of export receipts in convertible currency. 5/ Includes only effective loans. EMIDD April 23, 1981  - 28 - ANNEX II Page 1 of 8 pages STATUS OF BANK GROUP OPERATIONS IN ROMANIA Statement of Bank Loans (As of March 31, 1982) US $ Million Loan Fiscal Amount (less cancellations) Number Year Borrower Purpose Bank TW IDA Undisbursed Ten loans fully disbursed 478.1 - 1368-RO 1977 BAFI a/ Irrigation 60.0 0.01 1436-RO 1977 Investment Bank Bearings 38.0 4.4 1448-RO 1977 Investment Bank Polyester 50.0 0.3 1479-RO 1978 BAFI Agricultural Credit 71.0 3.9 1509-RO 1978 BAFI Irrigation 40.5 8.0 1536-RO 1978 Investment Bank Tire 85.0 34.0 1581-RO 1978 Investment Bank Post Earthquake 60.0 4.6 1634-RO 1979 Investment Bank Chemicals 40.0 2.7 1651-RO 1979 Investment Bank Pipe 40.0 25.7 1652-RO 1979 Investment Bank Thermal Power 70.0 22.2 1669-RO 1979 BAFI Livestock 75.0 16.2 1670-RO 1979 BAFI Irrigation 70.0 11.7 1764-RO 1980 BAFI Livestock 85.0 48.1 1794-RO 1980 Investment Bank Canal 100.0 0.9 1795-RO 1980 BAFI Irrigation 90.0 55.1 1876-RO 1980 BAFI Orchards 50.0 44.1 1936-RO 1981 Investment Bank Power IV 125.0 46.8 1937-RO 1981 BAFI Livestock 80.0 77.5 1938-RO 1981 BAFI Irrigation 75.0 75.0 1971-RO 1981 BAFI Irrigation 80.0 80.0 2034-RO 1982 Investment Bank Highways/Railways 125.0 125.0 2077-RO 1982 BAFI Agricultural Credit 95.0 c/ 95.0 Total 2,082.6 781.21 of which has been paid 89.4 Total now outstanding 1,993.2 Amount sold 19.8 of which repaid 19.2 0.6 Total now held by Bank b/ 1,992.6 Total undisbursed 781.21 a/ Bank for Agriculture and Food Industry. b/ Excluding exchange adjustments. c/ Not yet effective.  - 29 - Annex II Page 2 of 8 pages PROJECTS IN EXECUTION 1/ Ln. No. 1027 Otelin3x Special Steel Project; USO7O Million Loan of July 10, 1974; Date of Effectiveness: April 3, 1975; Closing Date: December 31, 1979 Execution of the project was delayed about three years, primarily becauSE: of the complexity of two large bid packages, the Romanians' lack of famili:arity with international competitive bidding procedures under the Bank's Guidelines, and lack of interest and competition among suppliers. Delays were also caused subsequently by late delivery and quality problems with Romanian manufactured equipment. The cold mill is now in operation and the bar mill was scheduled to start operation, in August 1981 but is now delayed to the first half of 1982. Total project costs are expected to be essentially the same as appraisal estimates. Final draft of the completion report is expected in April 1982. The loan is now fully disbursed and closed. Ln. No. 1028 Turceni Thermal Power Project; US$60 Million Loan of July 10, 1974; Date of Effectiveness: November 6, 1974; Closing Date: June 30, 1979 Project was completed after a 2-year delay but is operating at only 50% of rated capacity due to lower calorific value of lignite than the plant was designed for. Tests are being conducted to determine modifications required for processing lower quality fuel; main units may require redesign and reorder of lignite handling equipment and the clearing of the units. The loan is now fully disbursed and closed. Ln. No. 1242 Riul Mare Retezat Hydropower Project; US$50 Million of April 28, 1976; Date of Effectiveness: July 26, 1976; Closing Date: December 31, 1981 Due to shortage of manpower, tunneling works have been delayed which is hoped to be partially recovered by a modern large surface boring machine. Project completion will remain about two years behind schedule. Civil works for the dam and underground power station are well underway but also delayed by a similar period. The loan is now fully disbursed and closed. 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution and, in particular, to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.  - 30 - ANNEX II Page 3 of 8 pages Ln. No. 1247 Rasova-Vederoasa Irrigation and Agriculture Development Project; US$60 Million Loan of April 28, 1976; Date of Effectiveness: November 3, 1976; Closing date; June 30, 1981 Pumping stations, canals, and other project civil works are almost complete. The area irrigated in 1981 reached 52,000 ha. Out of 11 dairy farms, nine farms are in operation. Procurement under ICB is complete. The feedmill and silo in Negruvoda is completed. The grain silo at Baneasa is behind schedule and is not likely to be ready before June 1983. The loan is now fully disbursed and closed. Ln. No. 1368 Ialomita-Calmatui Irrigation Project; US$60 Million Loan of March 2, 1977; Date of Effectiveness: June 23, 1977; Closing Date: June 30, 1982 Contracts for all equipment and materials have been awarded. Progress has been good until recently when a shortage of construction materials and reduced allocation of investment funds have slowed down implementation. Progress on main and distribution canals, pipe networks, and drainage works are generally satisfactory. Ln. No. 1436 Brasov Bearings Project; US$38 Million Loan of June 15, 1977; Date of Effectiveness: August 11, 1977; Closing Date: December 31, 1982 Contracts on all major packages, have now been signed, and implementation of the project is proceeding ahead of the original schedule. However, delivery of retainer presses will delay full completion of the project by eight months. Project costs are expected to be close to, or slightly over, appraisal estimates. Overall economic aspects of the project look somewhat more favorable than at appraisal due to the improved market outlook, improved product mix, and changes in project design to achieve lower product costs. Ln. No. 1448 Cimpulung-Muscel Polyester Project; US$50 Million Loan of June 15, 1977; Date of Effectiveness: October 3, 1977; Closing Date: March 31, 1982 Closing date was extended to March 31, 1982 due to delays in the delivery of equipment for extrusion and drawing section which are manufactured locally. The loan is expected to be fully disbursed with withdrawal applications on hand.  - 31 - ANNEX II Page 4 of 8 pages Ln. No. 1479 Pig Production and Processing Project; US$71 Million Loan of July 15, 1977; Date of Effectiveness: September 28, 1977; Closing Date: June 30, 1982 The project represents the Bank's first participation in Romania in a development plan on a nationwide basis. It provides for establishment and modernization of large-scale pig breeding/fattening farms, development of selection centers, and provision of slaughtering and processing facilities. ICB procurement is completed. Investments for State farms and slaughterhouses continue to be ahead of schedule while those for cooperative farms and slaughter and meat processing facilities are behind schedule. Quality of workmanship and management of project facilities is satisfactory. Prospects for project completion as scheduled are good. Ln. No. 1509 Viisoara Irrigation Project; US$40.5 Million Loan of January 27, 1978; Date of Effectiveness: May 15, 1978; Closing Date: December 31, 1983 Bids for all procurement contracts have been awarded. Construction of project works is proceeding satisfactorily on all schemes except Calmatui subproject which has slipped by about a year. Irrigation of the entire 98,328 ha will now take place in 1984 rather than 1983. The Zimnicea and Viisoara Irrigation systems are expected to be completed in June 1982. Ln. No. 1536 Tires Project; US$85.0 Million Loan of March 31, 1978; Date of Effectiveness: June 9, 1978; Closing Date: June 30, 1983 Overall project implementation is proceeding satisfactorily. Plant start-up is expected in mid-1982 for the Zalau plant (truck tires), and in 1984 for Drobeta-Turnu Serverin (DTS) Plant (tractor and giant tires). Delays are also expected in the erection schedule at the DTS plant as well as in the delivery of local equipment for the off-the road (OTR) tire package. Slow disbursements is due to the delay experienced in obtaining a suitable supplier of technology and equipment for the OTR tire package for DTS. Ln. No. 1581 Post Earthquake Construction Assistance Project; US$60.0 Million Loan of June 12, 1978; Date of Effectiveness: - September 5, 1978; Closing Date: June 30, 1982 Implementation is proceeding satisfactorily. At the Borrower's request loan proceeds were reallocated to reflect more closely likely future commitments. The loan is expected to be fully disbursed by the closing date.  - 32 - ANNEX II Page 5 of 8 pages Ln. No. 1634 Craiova Chemical Project; US$40.0 Million Loan of January 15, 1979; Date of Effectiveness: May 2, 1979; Closing Date: December 31, 1982 There will be delays in startup of plants. The methanol plant will be set back by a year because of delays in the delivery of equipment. The acetic anhydride plant had some problems due to cracks discovered in the steel coils supplied by Welders. The PVA plant will also be behind schedule because of late delivery of locally made equipment. Most subprojects will be delayed because of late delivery of critical equipment and unavailability of construction labor. Ln. No. 1651 Roman Seamless Pipe Project; US$40.0 Million Loan of February 26, 1979; Date of Effectiveness: July 31, 1979; Closing Date: December 31, 1982 Most of the main technology package is on site and erection is scheduled to begin April 1982, but additional delays that have occurred in procurement will further set back project completion by another six months. The main building is almost completed and the foundation for the main mill is ready for erection. Construction of water supply facilities is however behind schedule. Project completion is now expected in December 1983. Ln. No. 1652 Second Turceni Thermal Power Project; US$70.0 Million Loan of February 26, 1979; Date of Effectiveness: June 29, 1979; Closing Date: December 31, 1982 The project is expected to be delayed by two years because of delays in Turceni I and the necessary sequential arrangements for implementation of both projects. Ninety-two percent of the loan funds have been committed. Ln. No. 1669 Second Livestock Project; US$75.0 Million Loan of April 16, 1979; Date of Effectiveness: July 6, 1979; Closing Date; June 30, 1984 Progress in project implementation is satisfactory. Investments for modernization of existing pig complexes are far ahead of schedule while those for new pig breeding/fattening complexes and new slaughter/meat processing facilities are being decreased. This shift is acceptable because of the higher profitability in modernization. Contracts for procurement of construction materials and slaughterhouse equipment have been awarded, but in February 1982, $468,000 worth of slaughterhouse equipment was cancelled from the loan because of misprocurement.  - 33 - ANNEX II Page 6 of 8 pages Ln. No. 1670 Mostistea and Calmatui Irrigation and Drainage Project; US$70 Million Loan of April 16, 1979; Date of Effectiveness: July 16, 1979; Closing Date: June 30, 1986 Project implementation is 2 years behind schedule, but a revised construction schedule and investment program are being prepared to minimize delays. All contracts for equipment and materials have been finalized except for the laboratory equipment and some contruction equipment. Supplies against contracts are being received close to the schedule. Ln. No. 1764 Third Livestock Project; USt85.0 Million Loan of January 11, 1980; Date of Effectiveness: April 15, 1980; Closing Date: December 31, 1985 Project implementation continues to be satisfactory. Contracts for construction materials, poultry farm and slaughterhouse equipment and chemicals for vaccine production have been awarded. Romania's present and expected shortage of high protein content poultry feed is closely monitored, and concrete proposals made by the Bank to improve the situation are being reviewed by the Romanian authorities concerned. Ln. No. 1794 Danube-Black Sea Canal Project; US$100 Million Loan of April 30, 1980; Date of Effectiveness: September 5, 1980; Closing Date: December 31, 1983 Project implementation is generally satisfactory although slight delays in excavation and construction of protection walls have been experienced. However, measures are being taken to make up for lost time. Procurement has been practically completed; 100% of the loan amount is committed and about 99% disbursed. Ln. No. 1795 Covurlui Irrigation Project; US$90 Million Loan of April 8, 1980; Date of Effectiveness: July 8, 1980; Closing Date: December 31, 1987 Award of ICB procurement contracts has been practically completed. Project implementation is about one year behind schedule mainly because of shortage of construction equipment caused in part by slow ICB procurement and delivery and by delays in transfer of equipment from other irrigation project sites. The Government is conducting a comprehensive study of equipment requirement and availability to improve planning and implementation.  - 34 - ANNEX II Page 7 of 8 pages Ln. No. 1876 Orchards Project; US$50 Million Loan of June 30, 1980; Date of Effectiveness: September 16, 1980; Closing Date: December 31, 1985 Project is progressing satisfactorily. The orchard component exceeded appraisal planting schedule estimates by 80%. In the fall of 1980 and spring of 1981, 4,800 ha were planted. An additional 1,200 ha currently are being planted, with future planting commitments totaling 11,715 ha. Construction of 4 of 19 cold stores is under way. The technical assistance component is expected to be finalized soon, and the fruit market study is under preparation by a special committee of 19 specialists. Ln. No. 1936 Power IV; US$125 Million Loan of January 9, 1981; Date of Effectiveness: April 23, 1981; Closing Date: June 30, 1984 Project is off to a slow start due to delay in completing the bidding documents for bank-financed items by the beneficiaries, its consulting organization and trade enterprises as well as on reaching agreement with the Bank on acceptable procurement procedures. Increases in operating expenses which are rising faster than increases in revenues have reduced internal cash generation to about 22% of proposed construction requiring additional financing from the State Budget to achieve planned construction expenditures. Ln. No. 1937 Livestock IV; US$80 Million Loan of January 9, 1981; Date of Effectiveness: April 7, 1981; Closing Date: June 30, 1986 Tender documents for ICB procurement of construction material have been delayed. Procurement of agroindustrial equipment is likely to be delayed to 1982. Upon Bank approval, international shopping procurement will commence. Ln. No. 1938 Bucsani-Buzau-Siret-Prut Irrigation Project; US$75 Million Loan of January 9, 1981; Date of Effectiveness: October 14, 1981; Closing Date: June 30, 1988 The main objectives of the project are to increase and stabilize crop production and to raise productivity in a gross area of 158,485 ha in the south-eastern part of Romania. This is to be accomplished through the construction of irrigation and drainage systems and related facilities. Procurement of equipment and materials is underway.  - 35 - ANNEX II Page 8 of 8 pages Ln. No. 1971 Caracal-Titu Irrigation Project; US$80 Million Loan of June 24, 1981; Date of Effectiveness: Not yet effective; Closing Date: June 30, 1986 The project has been declared effective on March 26, 1982. Three tender documents have been finalized and the remaining three are being reviewed. Final engineering designs are expected to be completed by the end of 1982. Ln. No. 2034 Land Transport Project; US$125 Million Loan of July 17, 1981; Date of Effectiveness: November 16, 1981; Closing Date: March 31, 1987 For the railways component, civil works have commenced on two subprojects--the Danube bridges and the new line between Vilcele and Rimnicu Vilcea, while for the roads component, construction has started on the new link between Fetesti and Cernavoda. Procurement by ICB of equipment and materials has already been approved. Consultants ae being retained to carry out the Traffic Optimization Study. Ln. No. 2077 Moldova Agricultural Credit; USt95 Million Loan of April 9, 1982; Date of Effeciveness: Not yet effective; Closing Date: December 31, 1986 Loan documents were signed on April 9, 1982 and terminal date for effectiveness is August 9, 1982. L  - 36 - ANNEX III ROMANIA VIDELE/BALARIA ENHANCED OIL RECOVERY PROJECT Supplementary Project Data Sheet Section I: Timetable of Key Events a) Timetable taken by country to 10 months (November 1980- prepare the project September 1981) b) Agency which has prepared the project Ministry of Petroleum c) Date of first presentation to the November 1980 Bank d) Date of first mission to consider March 1981 the project e) Date of departure of appraisal mission September 1981 f) Date of completion of negotiations April 16, 1982 g) Planned date of effectiveness September 15, 1982 Section II: Special Bank Implementation Actions: Bank mission visited Romania in early May to assist the Borrower in completing all formalities related to procurement documents and to review organizational arrangements underway for the start of project implementation. Section III: Special Conditions Special Conditions of the loan: i) TPB and ICPPG will core and log key wells and correlate old wells with new ones through radioactive logging inside the casing using appropriate techniques and equipment in consultation with the Bank (para. 56); ii) All necessary actions shall be taken to enable TPB to earn reasonable profits in relation to total revenues so that such profits together with depreciation and reserve discovery charges shall be sufficient to service TPB's debts and to finance a reasonable portion of its investments (para. 58); and iii) TPB and ICPPG shall take all steps necessary to ensure that iconcentration of harmful gases in the Project area will not exceed the agreed safety level (para. 63).  606 ARID ' - -' i' 2' ~ -_. _._. rH G , _ g e 2 IBRBD 16066 ;i : ffi ---- -- - U. S. S R. ROMANIA HUNGARY ,r' 0066060~~~~~~~~~~~~~D..b,,-_ VIDELE/BALARIA ENHANCED -K < ROHAMAN 'h J> : I,- ,roHo >HN6 OIL RECOVERY PROJECT HAOG6IOHHIA Bi'ttt i ,, S,ghctlrMarm. rl ,> ~ ~ ~ ' Doroho, nSaven 7 OIL AND GAS SUBSECTOR U