Benin - Seme Oil Field Development (Phase II) Project

Document of The World Bank FOR OFFICIAL USE ONLY r Report No. P-3834-BEI REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT OF SDR 17.2 MILLION TO THE PEOPLE'S REPUBLIC OF BENIN FOR THE SEME OIL FIELD PHASE II DEVELOPMENT PROJECT May 30, 1984 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 - Franc CFA. (FCFA) US$1.00 = 418 FCFA FCFA Million = US$2,392 Weights and Measures Bbl = Barrels of 42 US gallons BD = Barrels per day ha = Hectare (10,000 sq. meters) GWh = Gigawatt hour (1 million kWh) km = Kilometer (0.62 miles) kWh = Kilowatt hour kVA = Kilovolt ampere lr = liter (0.26 US gallon) m = cubic meter MW = Megawatt (1,000 kW) MMB = Million barrels Abbreviations and Acroryms ECGD = Export Credits Guarantee Department (UK) EIB = European Investment Bank ERR = Economic Rate of Return GIEK = Guaranti-Instituttet for Eksportkreditt (Norway) IDA = International Development Association OIP = Oil in Place Saga = Saga Petroleum, A.S. SPB = Saga Petroleum Benin, A.S. Fiscal Year January 1 to December 31  FOR OFFICIAL USE ONLY PEOPLE'S REPUBLIC OF BENIN Seme Oil Field Phase II Development Project Credit and Project Summary Borrower; People's Republic of Benin Amount: SDR 17.2 million (US$18.0 million equivalent) Terms: Standard IDA terms Project Description: The purpose of the project is to assist the Government to optimize the development of the Seme oil field. The field is being developed by Saga Petroleum Benin (SPB), a Norwegian oil company, under a service contract with the Government of Benin (Phase I). Specifically, the project will permit further development of the proven reserves and delineation of possible extensions to the reservoir (Phase II). The project includes the following components: (i) the drilling of five development wells and two confirmation wells; (ii) the installation of three monopod structures and an integrated wellhead/production platform; (iii) modifications to Phase I installations; (iv) consultancy services for detailed engineering and supervision during construction. Specialized consultants will also be hired to assist the Government in monitoring SPB's activities, evaluating gas reserves and studying the economics of their utilization; and (v) training of Beninese professionals in the petroleum sector. Project Benefits and Risks: The project will permit the Government to produce an incremental 5.2 MMB from the field and make the overall Seme development project profitable. The risks associated with the project are those inherent in petroleum priduction. These concern particularly the dritlir,g of dry wells, operating problems such as malfunction of downhole pumps, water and sand production, and possible improper reservoir management. These risks are acceptable This documnent 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 - as development and operating experience has already been gained on the field since June 1982, and appropriate steps have been taken to minimize them. They include a 3-D seismic survey to better locate wells, an independent reservoir engineering study, technical assistance from pump manufacturers, and provision of consultants' services for close technical supervision of SPB. There is a financial risk in the short term evidenced by the relatively low debt service coverage ratio of the project. (US$ Millions) Estimated Project Costs Local Foreign Total Drilling of seven wells 1.1 11.4 12.5 Three monopods 0.3 5.5 5.8 Integrated production platform and equipment 1.4 15.0 16.4 Modifications of Phase I installations 0.2 1.2 1.4 Consulting services - 2.6 2.6 Training - 0.2 0.2 Base Cost 3.0 35.9 38.9 Physical contingencies 0.3 3.6 3.9 Price contingencies 0.2 2.3 2.5 Total Project Cost 3.5 41.8 45.3 Financing Plan IDA - 18.0 18.0 EIB - 15.0 15.0 Other co-financing - 7.5 7.5 Government contribution 3.5 1.3 4.8 3.5 41.8 45.3 Estimated Disbursements (US$ Millions) FY85 FY86 FY87 Annual 11.1 5.0 1.9 Cumulative 11.1 16.1 18.0 Economic Rate of Return: 60% for Phase II project 11% for overall Senne development project Staff Appraisal Report: No. 5011-BEN, dated May 30, 1984  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE PEOPLE'S REPUBLIC OF BENIN FOR THE SEME OIL FIELD PHASE II DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed Development Credit to the People's Republic of Benin for an amount in various currencies equivalent to Special Drawing Rights 17.2 million (US$18.0 million equivalent) on standard IDA terms to help finance the Seme Oil Field Phase II Development Project. PART I - THE ECONOMY 2. The latest economic report on Benin (Report No. 4686-BEN) was cir- culated to the Executive Directors in April 1984. The paragraphs below are based upon that report and other information that has since become available. Annex I provides basic country data. Political Background 3. After independence in 1960, a period of instability characterized by frequent changes in Government prevailed in Benin until the revolution in 1972, which brought to power the military Government of Lieutenant-Colonel Kerekou. The country has since then enjoyed a comparatively long period of political stability under a one-party system. Following the adoption of a new corstitution, President Kerekou was confirmed in 1980 as head of a largely civilian Government. Structure of the Economy 4. Benin is a small, poor nation with a population of 3.5 million and an estimated 1982 per capita CDP of US$280. Agriculture, the most important sector of the economy, employs three-fourths of the active population and accounts for 40 percent of GDP and 36 percent of foreign exchange earnings. There is a small industrial sector consisting of a few import substitution and agricultural processing plants. It contributed an estimated 11 percent to GDP in 1982. The tertiary sector is dominated by trade and transit activities that link economic activity in Benin to conditions existing in neighboring economies. 5. The agricultural sector is predominantly foodcrop oriented, producing maize, sorghum, yams, cassava, beans and small quantities of rice. Benin, at present, enjoys an overall food surplus; it is estimated that a significant portion of domestic foodcrop output (perhaps as much as 20 percent) is exported unofficiaLly to Nigeria and Niger. This offsets Benin's foodgrain imports which have been rising in recent years. The main export crops are palm oil, cotton and peanuts. Cotton, which is well-suited environmentally to  - 2 - conditions in northern Benin, is rising in importance while oil palm in the south is in relative decline because of insuff-icient rainfall. 6. The production of petroleum, cement and sugar which have significant export potential began recently. For cement and sugar, however, major marketing hurdles will need to be cleared to permit export sales to take place, particularly to Nigeria. Recent Economic Developments 7. Real GDP growth during 1978-1982 averaged about 5 percent per annum, up substantially from the 0.7 percent annual average during the 1972-76 period. Growth appears to have been strong in 1977, 1981 and 1982 when there were sharp increases in construction, manufacturing, trade activity and public administration. This growth was linked to the heavy public investment program and to strong growth in commercial activities due to the oil boom in Nigeria and the uranium boom in Niger. Agriculture, on the other hand, consistently grew at less than one percent per annum between 1970 and 1975, and grew at an average rate of 2% between 1976 ancd 1981. Agricultural performance improved substantially in 1982 and 1983 with a sharp rise in cotton output attributable to higher producer prices and the availability of modern inputs. 8. During the mid-seventies, the Government expanded its presence in the modern sector of the economy by nationalizing the major industrial enterprises as well as extending its involvement in the agricultural sector. The First Development Plan (1977-1980) went further by irnvesting in three large projects; Seme Petroleum (see para. 29), Save Sugar and Onigbolo Cement. This policy of greater Government involvement has determined the course of the recent evolution of public finance, external debt, and external balance. 9. Until the late seventies, the Government maintained a conservative public finance posture. Tight control over expenditure resulted in current budget surpluses, which averaged 31 percent of revenues between 1977 and l979. Modest foreign borrowing financed the limited public investment program. More recently, the public finance current surplus has been declining, partially because of rising current expenditures, about three- fourths of which are wages and salaries. The other factor contributing to this decline is the weakened revenue base. Over half of public revenues are derived from import duties, of which a significant proportion is levied on imports re-exported (officially or unofficially) to Nigeria and Niger. The downturn in economic activities in these neighboring countries has reduced demand and limited the inflow of dutiable goods that transit through Benin. In consequence, the current budget surplus fell to about 5 percent of revenues in 1983. 10. Public enterprise financing also poses a problem for Government finances. Two-thirds of the 60 public enterprises in Benin are in financial difficulties. Losses have been financed by the state-owned banks, rather than through transfers from the budget. As many of these advances cannot now be repaid, the Government, either as shareholder or as banker, will have to cover these deficits. Public enterprise l fficulties have stemmed from poor initial project design, undercapitalization, inexperienced business management, inadequate Government pricing and personnel policies, and other inefficiencies. In 1982, the Government announced a series of measures to  - 3 - strengthen the public enterprises, including more realistic pricing policies, better incentives for managers and workers, tougher controls, and the liquidation of non-viable units. A program is now being prepared (see para. 20) to support these decisions. 11. In the external sector the growth of exports has been modest while imports have grown rapidly, mainly because of capital imports associated with the major public investments. In 1981, the resulting current account deficit reached 34 percent of GDP as the investment ratio reached 35 percent of GDP. Financing came mainly from external loans, principally supplier credits and long-term official lending. Policy Changes and Future Prospects 12. Confronted by many problems, the Government has begun to eliminate economic distortions and to lay the foundation for growth. The Government has sought to strengthen its ability to manage its public finances including external debt and to improve planning functions. Agricultural producer prices are being raised, and input subsidies are being eliminated in a planned fashion. Major reforms have been decided in the pricing, personnel and management policies affecting the public enterprises, and some marginal enterprises have been closed. In addition, the Government has decided that its direct involvement in productive activities will be reduced and private capital will be accorded a greater role in the development process. These policy changes, which are reflected in the new medium-term Development Plan (1983-1987) should lay the basis for more vigorous growth in the longer term. 13. Benin's growth performance will be limited by several constraints which make it unlikely that GDP will grow by more than an average of 3 to 4 percent per year during the 1982-90 period, even taking the Seme oil output into account. Key constraints include the slowdown in demand in neighboring countries and the poor initial performance of the cement and sugar projects. 14. The public finance situation is likely to remain difficult in the years ahead due to the recurrent cost implications of recent major investments, the need to re-finance a number of public enterprises, and the external debt problem. On the revenue side, the buoyancy in import duties over the last few years associated with goods re-exported to neighboring countries is not likely to continue in the mid-1980s. The exploitation of Seme oil is not expected to make even a modest contribution to fiscal resources until 1986. Import duties are projected to continue providing slightly over half of total Central Government revenues. 15. Benin's balance of payments is difficult to project because of the large size of unrecorded exports. It is estimated, however, that the current account deficit in relation to GDP will decrease during the rest of the 1980s. This results from expected new exports of petroleum, cement and sugar by 1985 and from a decline in the real value of capital imports from the high levels of 1981-82, following completion of the cement and sugar projects. As a result of a more modest leveL of public investment, fewer loans will be required in the near-term. There-ore debt service ratios should begin to stabilize, although at a higher level than in the past. The ratio is projected to remain at about the 25 percent level through 1990. To address the financial disequilibrium in general, the Beninese authorities have begun a  - 4 - dialogue with the IMF in the hope that this will result in an IMF-supported stabilization program. 16. Benin remains a very poor country with large needs for directly productive investment and supporting infrastruct;ure. Its increased debt burden due to heavy foreign borrowing in support of public investments will constrain future access to commercial loans. The Government has recognized the need to mobilize increased concessionary financing from bilateral and multilateral sources, as reflected in the Donors' Roundtable Conference convened in March 1983. In view of Benin's poverty and the inability of public savings to finance more than 5-10 percent; of the future public investment program, the country will continue to need foreign financing on concessionary terms. Foreign donors should provide a large share of total project costs, including, if possible, the financing of local costs. PART II - BANK GROUP OPERATIONS IN BENIN 17. To date there have been 19 IDA credits to Benin, including two supplementary credits, totalling US$182.47 million. Five of the credits were for agriculture, seven for road construction and maintenance, two for education, two for energy, and one each for port expansion, urban water supply and development of small- and medium-scale enterprises. Annex II contains a summary statement of Bank group operations in Benin as of March 31, 1984. In the past, the Bank Group's dialogue with Benin was limited and based on a case-by-case approach to lending operations. More recently, however, the policy and lending dialogue has intensified and Government has displayed considerable interest in and responsiveness to Bank advice and policy assistance. 18. A large proportion of Bank assistance to Benin's development so far has been in the agricultural sector. IDA's earlier operations in this sector met with mixed success and, in fact, during the execution of an IDA-FAC Zou- Borgou credit for cotton development made in 1972, cotton production actually fell. In 1977, a technical assistance credit was approved to help the Government better prepare rural development projects. The assistance provided by this credit was instrumental in preparing the Borgou, Zou and Atacora provincial rural development projects. Under the Borgou project, for which a US$17 million IDA credit was approved in April 1981, cotton production in the Borgou province doubled in the 1982-83 season and sharply increased again in the 1983-84 campaign. The Zou Project (FY83 IDA US$20 million) is noteworthy for the fact that it includes financing of fertilizer import's on a declining scale as a response to the Government decision to phase out fertilizer subsidies and reduce pesticide subsidies. The rural development project in Atacora Province, appraised by the Bank, was financed by a US$6 million credit from the International Fund for Agricultural Development (IFAD). 19. In the tranzport sector, Bank involvernent began with a Land Transport Study which led to tIne financing of a four-year Highway Maintenance Project beginning in 1969-1970. Since then, the Bank Group has financed three highway projects, two feeder roads projects and a port extension project. In general, these projects were satisfactorily completed with actual economic rates of  return comparing favorably with appraisal estimates. In the case of the Third Highway Project, however, the project completior. report notes that institutional development objectives were only partially met. A third Feeder Roads Project was approved on May 29, 1984. 20. Following the Government's decision in 1982 to proceed with the reform of public enterprises, it requested Bank group support in the public enterprise sector. Discussions in progress are expected to lead to agreement on specific policies for this sector. An IDA credit to finance detailed studies needed to prepare individual enterprise rehabilitation programs, and to finance the execution of these programs, is under preparation. A second project under preparation is a technical assistance effort designed to strengthen Benin's macroeconomic planning and public finance management. Other assistance to Benin is expected to continue in the transport, education, urban and energy sectors. In the energy sector, the Nangbeto Hydroelectric Project, to be implemented jointly by Benin and Togo, will be presented for Board consideration shortly. 21. Benin's performance with respect to project implementation and disbursement is generally satisfactory, and the Government is quite familiar with the Bank's procurement and disbursement procedures. Delays are sometimes encountered, however, because of the Government inability to make timely contributions of counterpart funds, a problem which has been exacerbated by the difficult budgetary situation. PART III - THE ENERGY SECTOR Energy Demand and Supplies _/ 22. Because of low per capita income (about US$280 in 1982) and an undeveloped industrial sector, Benin's energy consumption--230 kg of oil equivalent per capita in 1982--is among the lowest in the world. Traditional fuels, primarily wood and charcoal, satisfy 87% of energy needs, the rest being met by imported petroleum products (11%) and imported hydropower (2%). The country's major energy sources are dense forests and savannahs, covering about 78,000 km2, but their indiscriminate use is leading to rapid deforestation near cities and villages. The Government has taken steps to promote small- and medium-scale forestry industries and to reduce uncontrolled exploitation of natural woodland by establishment of plantations. Five projects are under implementation or preparation with financing from various aid agencies including a US$13 million forestry project to be financed by IDA and the Federal Republic of Germany. The hydrocarbon resources are not yet fully appraised. A small offshore oil field, Seme, is under exploitation by the Government with the assistance of a Norwegian oil company. The rest of 1/ The energy data base in Benin is poor and incomplete. The Bank Energy Assessment mission, which visited Benin in August 1983, prepared an energy balance and evaluated the issues and options in the sector. This section relies primarily on this information.  -6- the basin has yet to be explored and the Government plans to promote acreage to foreign oil companies within the next six months under an exploration promotion program financed under Credit 1207-BEN (see para. 28). Benin's hydroelectric potential is estimated at 750 GWh per year in addition to the joint 65 MW Nangbeto hydroelectric scheme with Togo which is under an advanced stage of preparation with financing from Credit 1189-BEN. 23. The demand for petroleum products which was growing at about 12% p.a. in the late 1970's decreased sharply in 1980 following a 50% increase in the price of products. Since then, consumers have resorted to unrecorded imports from neighboring countries which are estimated to represent 30% of the official imports. The official consumption totalled 139,000 tons in 1982 (the equivalent of 3,000 BD), representing an import bill of US$48 million, or 20% of the value of merchandise exports and 8.4% of total merchandise imports in that year. The Seme field has been producing crude since October 1982. Benin has no refinery, all petroleum products are imported (mostly from Algeria), and the Seme crude is exported. The production from Seme is forecasted to plateau around 7,000 BD in the years 1985-87 and decline thereafter, so Benin is expected to again become a net importer in the petroleum subsector around 1989 unless other fields are discovered and developed by then. 24. Electric energy consumption, which totalled 148 GWh in 1982, was mostly supplied (92%) by the Akosombo hydroelectric plant in Ghana. The installed thermal capacity in Benin--about 40 MW plus two 8-MW diesel units to be commissioned soon--comDares favorably with a peak demand which totalled only 27 MW in 1982. The thermal plants, used historically mostly as standby units, are now operating with much higher load factors since the late 1983 decision by Ghana to curtail by 50% its delivery of hydropower because of critically low water levels in Volta Lake. The consumption of petroleum products for thermal power generation is therefore expected to increase significantly until hydro energy is again available. Energy Pricing 25. Prices for traded fuelwood (only 15% of total consumption) have increased more than ten-fold in current terms d[uring the last decade and the cost of fuelwood supplies is quite high compared to the average monthly income (about 10%), although fuelwood prices are about 50% below kerosene prices. Electricity prices have just been increased by about 80% to reflect the long- term marginal cost of electricity, as recommended under a tariff study financed under Credit 1189-BEN. Retail prices of petroleum products are on the average set above border prices. The price of gasoline is US$1.75/gal equivalent, 27% above the economic cost of US$1.38/gal.- Kerosene is the only product which is subsidized (about 10% below the economic cost) for social reasons, as is the case in most African countries. The prices of petroleum products could not be increased much higher because of the ready availability of these products from a low-cost source across the Nigerian border which places Benin in an atypical situation where demand for officially-imported petroleum products is very price-elastic. 1/ Based on a March 1983 exchange rate of FCFA 350/US$, and including handling, transportation, distribution and profit margin.  - 7- Sector Institutions 26. A number of government institutions participate in energy policy making. The Ministry of Industry, Mines and Energy (MIME) supervises the state-owned power and water utility and the entity in charge of supervising the search for hydrocarbon resources in the country. It also oversees Saga, a Norwegian oil company, which is developing and operating the Seme field on behalf of the Government. The Ministry of Commerce supervises the state enterprise which has a monopoly on petroleum products imports, transport and distribution. The Ministry of State Farms, Livestock and Fisheries supervises the state enterprise responsible for developing forestry resources, promoting more efficient production of traditional fuels, and distributing wood and charcoal. The Ministry of Finance and the Ministry of Planning play a role in energy matters by administering fuel taxation and participating in decisions on the public investment program. Energy prices are set by a Price Committee composed of representatives of various ministries and political organizations. Oil Exploration History and Government Strategy 27. Benin's main sedimentary area covers about 15,000 kmi2, of which only some 2,000 km2 on the continental shelf (up to 200m water in depth) seem to have a fair hydrocarbon potential. Benin's coastal basin belongs to the Dahomey Embayment, a small geologic province different from neighboring basins in its stratigraphic sequence and tectonic features. Two foreign oil companies, Union Oil (1965-1972) and Shell Oil (1971-1975), have explored for petroleum in offshore Benin, shooting 6,000 km of seismic lines and drilling nine exploratory wells. In 1968, Union Oil discovered the Seme field 15 km off the coast in water depths ranging from 20 m to 54 m. In late 1973, it proposed a development plan to the Government but negotiations fell through and Union Oil relinquished its exploration acreage, given the expected marginal internal rate of return of the development scheme by industry standards. Subsequent negotiations with several oil companies did not bring about an agreement to develop the Seme field on a concession basis, because the economics of the field, even after the 1974 oil price increase, remained marginal and the oil companies could not offer terms attractive to the Government. The Government decided in 1978 to develop the field on its own with the support of the Norwegian Government. In May 1979, the Government hired as operator under a service contract Saga Petroleum, A.S. (Saga), a J private Norwegian oil company. Financing was obtained from Norwegian banks and guaranteed by the Norwegian Government. Work on the project was initiated in April 1980 (see para. 29 for further discussion on the Seme field). 28. Since 1977 no oil company has held exploration rights in Benin. As Benin's sedimentary basin outside Seme was little-known, the Government decided to get more data to see if it could promote exploration by foreign oil companies. Thus, the IDA technical assistance project to the petroleum sector (Credit 1207-BEN approved in February 1982 - see para. 37) included a petroleum exploration promotion component. Under this financing, 1,500 km of offshore seismic lines were acquired and processed in 1982-83. The basin evaluation report concludes that the Seme field appears to be unique in  - 8 - Benin's offshore basin, and a similar combination of traps is unlikely to be found. The western half of the offshore basin and the onshore basin are considered to have low prospectivity. However, various prospects have been identified in the eastern part of the basi.n. They can be divided into two categories: (i) structural traps which appear too small to attract most of the foreign companies, but could still interest the Government as an addition to the Seme field; and (ii) subtle traps (unconformity, stratigraphic and paleogeomorphic traps) which might interest foreign oil companies, provided the terms of the contract reflect the high risks involved. The Government has hired a consultant to prepare the economics of a model contract, and plans to invite bids for acreage acquisition in the second half of 1984. Phase I of the Seme Oil Field Development Project 29. Implement: tion and Production History. Seme oil reserves were discovered in two ndependent fields: the main one, North Seme, and a smaller one, South Seme. Saga envisaged the development of the fields in two phases: Phase I, where 9.8 MMB would have been recovered by natural depletion with six wells (four in North Seme), and Phase II, originally envisaged as a secondary recovery project, where an additional 11.9 MMB would have been recovered by water injection. Phase I included mainly the construction of a jack-up platform for drilling and workovers, three wellhead platforms, one of them being also a production platform, and an onshore tank farm. All installations were ready for the spudding of the first well in June 1982, within the time frame and budget established by Saga. However, the drilling and initial operating phase suffered from several technical setbacks which delayed production: (i) the first well proved to be dry, and a side-tracking undertaken a year later also proved to be dry; (ii) the jack-up platform had an accident to one of its legs which required a lengthy repair; and, (iii) the downhole pumps broke down frequently thus limiting production. The field started producing commercially on October 31, 1Si82, the first crude shipment took place on April 15, 1983, and accumulated production was about 2 MMB as of March 1, 1984. Production averaged 7,300 BD in the months of January-March 1984. Five wells are now in production and the sixth well of Phase I is expected to be drilled in November 1984. The production history and reservoir simulation studies indicate the existence of a partial water drive, thus the implementation of the above-referenced secondary recovery project has been postponed and may not be required at all. A step-out confirmation well, drilled in July 1983, has proven a western extension of the field which will be developed under the proposed Phase II project. Other potential field extensions have been identified to the north and northwest of the field which will be delineated under the proposed project. A deep production well drilled in March 1983 penetrated a gas strucLure in the deeper zone of the reservoir which will be tested under the proposed project. 30. Costs and Financing. Phase I investments, when com eted, are expected to cost NKr 780 million (US$121 million equivalent)- , with a cost overrun of 5% over the budget due mostly to the drilling of two dry wells. The Beninese Government is the sole owner of the project assets. It initially 1/ Excluding capitalized training and Phase II preparation costs financed under IDA Credit 1207-BEN (about US$5 rnillion).  -9- invested US$13 million equity in the project in 1980. Saga is not an investor. A blend of commercial loans and export credits totalling about US$120 millio and covering 90% of the initial project financing requirements- (including about US$19 million of interest during construction) was secured from Norwegian banks (US$112 million equivalent) with the guarantee of the Norwegian Export Guarantee Institute (GIEK) and a UK bank (US$8 million equivalent) with the guarantee of the British Export Credit Guarantee Department (ECGD). The loans and export credits are repaid through N, a security arrangement, whereby all sales proceeds are deposited in a trustee account managed by a Norwegian Bank. 31. The financial performance of Phase I has been unsatisfactory because of delays in production and a drop in oil prices. In late 1982 and in 1983, Saga was operating the field on a precarious cash-flow basis, delaying some of the suppliers' payments until the first sales revenues came in May 1983 as Phase I loans were totally drawn down. Moreover, the Phase I debt service was established on a tight schedule which left little room for delays and/or a decrease in revenues. Although the first interest payments due on December 31, 1983, were paid on time, sufficient funds were not generated by the project to cover the first US$10 million principal payment due on that date. In December 1983, the Phase I lenders and the Beninese Government agreed in principle to reschedule this principal payment and the one due on June 30, 1984 to be repaid in five semi-annual installments starting on December 31, 1984. The formalization of the rescheduling agreement would be a condition of credit effectiveness (Section 6.01(b) of the draft Development Credit Agreement). The financial structure of the project will be strengthened by the provision of equity through the proposed IDA credit. The possibility of increasing the equity base of the project through investments by private partners was envisaged. This approach was not pursued due to the relatively low profitability of the overall project and the commitment of large parts of the cash flow to service the debt of Phase I. 32. Institutional Arrangements. The Government, which owns directly all assets of the project, has not created a national oil company. Saga, under its service contract, became the Government's authorized agent for all field development, production and marketing operations, as well as for securing financing for the project. Saga has created a wholly-owned subsidiary, Saga Petroleum Benin A.S. (SPB), registered in Norway, with a branch office in Benin. SPB employs both the expatriate (70)2' and Beninese (310) staff P working on the project. Saga appoints, subject to approval of the Beninese Government, a general manager for SPB who makes all operating decisions in the field. Under Phase I institutional arrangements, the Beninese Government has been supervising SPB's activities with four "co-managers," employed by SPB who 1/ The balance of financing requirements, US$7 million (Investments $121 million + interest during construction US$19 million - Equity US$13 million - Loans US$120 million), has been financed from the project cash flow. 2/ Including the 20 expatriate staff of the drilling contractor. The number of expatriate staff for Phase I operations would be reduced to 50 by end- 1984.  - 10 - have therefore a dual role: (i) as employees of SPB they perform their own day-to-day activities, as would any other manager, and (ii) as Government representatives they supervise the activities of SPB and advise the Government on Beninese decision making. While this arrangement has allowed the Government representatives in SPB to receive effective on-the-job training, it limited their time available to effectively monitor SPB's activities and created a potential conflict of interest. This issue has been resolved for Phase II by the creation of a small independent project unit in charge of monitoring SPB's activities which will report directly to the Minister of Industry, Mines and Energy (see para. 50). 33. Salaries for Beninese staff are in line with neighboring countries' industry practices and are significantly above average Beninese salaries for similar jobs in other sectors. There has been no Beninese turnover since project start. The Beninese staff of SPB will be subject to a framework for salary policy (Convention Collective) that will regulate salaries in the sector. It was agreed upon during negotiations that the Government would pay the petroleum sector staff according to the above arrangements (Section 3.04 of the draft Development Credit Agreement) and the signature of the Convention Collective would be a condition of credit effectiveness (Section 6.01(d) of the draft Development Credit Agreement). Actions To Be Taken for Phase II Implementation 34. The implementation of Phase I has been constrained due to the specific arrangements made initially (tigh project financial structure, tied financing, limiting cost competitiveness,- and management by a relatively new oil company). The technical setbacks described above have endangered the financial viability of the project. However, the outlook for recovery appears favorable. The western extension of the field has been proven and additional possible reserves have been identified. There is evidence of a partial water drive which will allow a higher recovery than anticipated without need of water injection. The operating efficiency, principally downtime due to pump breakdown, has improved. The drilling efficiency has also improved. 35. The Beninese Government has decided to continue to entrust SPB with developing and operating the field. This arrangement is acceptable as the Government has agreed to take the following actions: (a) set up the above-referenced project unit, to be assisted by an expatriate petroleum engineer-consultant, to closely monitor SPB's activities; (b) strengthen the financial structure of the project by providing additional equity through the proposed IDA Credit; 1/ At least 72 percent of the goods and services had to be procured from Norway.  - 11 - (c) introduce international competitive bidding procurement procedures to minimize the Phase II investment costs; (d) make its best efforts to minimize operating costs by introducing competitiveness when contracts with existing service suppliers expire; (e) amend the service contract with SPB to reflect the revised institutional arrangements; and (f) have independent auditors acceptable to IDA perform a detailed financial audit of the project accounts. The Government's Strategy and IDA's Role in the Energy Sector 36. The Government's strategy in the energy sector is sound and cautious. Its major goal is to develop the country's limited energy resources. In the power sector, IDA has been helping the Beninese Government prepare the Nangbeto hydroelectric project and an electricity master plan, and implement appropriate tariffs (Credit 1189-BEN). A forestry project, including a fuelwood plantation component, that would assist the Government to alleviate fuelwood shortages is under consideration for IDA financing (see para. 22). 37. The Government's investment and pricing policy in the petroleum subsector is adequate. Prices are above international levels and plans to build a refinery have been abandoned. The Government's strategy for developing the petroleum resources of the country is two-fold: to develop the Seme oil field on its own while at the same time to promote the rest of the sedimentary basin to the private oil industry. IDA has assisted the Beninese Government in this strategy, under Credit 1207-BEN approved in February 1982, which had three major objectives: (a) training Beninese personnel to be employed on the Seme field; (b) promoting exploration acreage to private industry; and (c) preparing Phase II of the Seme development project. The training component is almost completed: (a) 104 Beninese-trained technicians are employed on the Seme field, replacing costly expatriate manpower (e.g., certified welders, mechanics, roughnecks, derrickmen and wireline operators); and (b) 15 Beninese professionals (drilling, production and reservoir engineers, geologists and geophysicists) have responsibilities within SPB and the Government unit in charge of supervising the promotion of exploration by private companies. The Government has prepared a second-phase training program for the Beninese to be promoted to replace expatriates and for additional staff to be recruited for Phase II and replace the Beninese staff promoted. This program will be financed from the remaining uncommitted funds of Credit 1207-BEN until mid-1985 and thereafter through the proposed IDA Credit (see para. 40). The progress of the exploration promotion component is discussed in para 28. The engineering studies financed under Credit 1207-BEN have been the basis for the preparation of the proposed Phase II development project. 38. IDA's participation in financing Phase II of the Seme project will: (a) assist the Government to develop the field in a technically and economically efficient manner. This will continue what has already been  - 12 - accomplished under Credit 1207-BEN, not only in terms of financing consultants, but also through direct advice from Bank Project Staff (e.g., Project Staff recommended a 3-D seismic survey to reduce risks of drilling dry wells); (b) attract co-financing for the project. The World Bank Group presence provides support for the project both in terms of technical and financial risks. World Bank Croup involvennent is an incentive for other lenders (European Investment Bank and possibly export credit agencies) to participate in the financing of a project which originally suffered several technical setbacks. The provision of IDA funds as equity injection to the project will permit a financial restructuring to strengthen the debt repaying capability of the project. This is particularly important as the short-term financial outlook for the project remains uncertain; and (c) improve the project's institutional arrangements by assisting the Government in more efficiently supervising the development of the field by SPB. PART IV - THE PROJECT Project Objectives and Background 39. The proposed project is the logical continuation of the first-phase development of the Seme field. Its basic objective is to fully develop the proven reserves, including the western extension proven in July 1983 (see para. 29), and to delineate possible additional reserves to ensure optimum development of the field. The Government officially requested IDA assistance in financing Phase II in July 1982, but, due to a change in reservoir behavior and interpretation, the definition of the final project scope was delayed until the last quarter of 1983. The project was appraised in December 1983. Credit negotiations were held in Washington, D.C. in mid-May 1984. The Beninese Government was represented by a delegation headed by Mr. Barthelemy Ohouens, Minister of Industry, Mines and Energy. The Staff Appraisal Report (No. 5011-BEN), dated May 30, 1984, is being distributed separately to the Executive Directors. A Supplementary Data Sheet appears as Annex III. Project Description 40. The proposed project comprises the following components: (a) Drilling of five development welLs. Five development wells will be drilled to fully develop the proven reserves of the field. An estimated incremental 5.2 YMB would be recovered over the next eight years. The first well will be drilled from the existing platform, P-1, the second completed as a monopod, and the last three completed from an integrated wellhead/production platform (component (e)); (b) Drilling of two confirmation wells. Two confirmation wells will be drilled to prove the possible north and northwestern extensions of the field. If these reserves are proven, the proposed project could be followed by a Phase III project to develop them;  - 13 - (c) Modifications to Phase I installations. The existing production platform (P-3) will be modified to handle more liquid volume by installing emulsion treatment equipment, booster pumps and electrical power generation. On the onshore tank farm, an electrostatic heater will be installed to further treat emulsion problems. The existing communication system will be expanded to have a two-way line of communication between all offshore and onshore installations; (d) Monopod platforms. Three monopod platforms will be constructed and installed. One will be installed on a development well to rapidly put it in production. The two other monopods will be installed on the confirmation wells, to put them in production; (e) Construction and installation of an integrated well and production platform. The platform will be constructed to accommodate the last three development wells of the Phase II investment program, and other additional wells that may be required in a possible Phase III development project. The platform will also include incremental production and living facilities; and (f) Engineering and consultancy services. Engineering studies and bid preparation will be performed for the platform P-3 modification and monopod and integrated platforms, including supervision (project management) during construction and installation. Specialized consultancy services will be contracted to assist the Government in-monitoring SPB's activities. The natural gas resources encountered in the Seme field (see para. 29) will be tested to assess reserves and deliverability. Consultants will be contracted to study the detailed economics of their utilization. (g) Training program. This component will finance specialized technical courses overseas for Beninese professionals (mostly drilling, production and reservoir engineers and geologists) to improve their technical capabilities so that they could replace expatriates. 41. The project will be implemented in stages. The first stage will include the drilling of the first two development wells and the two confirmation wells. The second stage will be the drilling of the last three development wells from the integrated production platform. The installation of the platform is justified mostly on the assumption that the possible additional reserves will be proven. If the results of the confirmation wells are negative, it could be more economical to use monopods rather than an integrated well and production platform to put the last three development wells of the project in production. The project scope would be modified and its cost reduced (see para. 47). It was agreed during negotiations that the int-grated platform would be constructed and installed only if the Government and IDA have determined that, based on the results of the first confirmation well and an updated feasibility study, the installation of the integrated platform is economically justified (Schedule 2 to the draft Development Credit Agreement).  - 14 - Project Costs and Financing 42. The project is estimated to cost US$45.3 million, including physical and price contingencies. The foreign component is estimated at US$41.8 million. Physical contingencies were determined on the basis of a 10% rate and price contingencies on the basis of a 3.5% inflation rate in 1984, 8% in 1985, and 9% in 1986. 43. The proposed financing plan for the project is as follows: US$ Million Percent,% IDA Credit 18.0 40 EIB Loan 15.0 33 Other Co-Financing 7.5 17 Government Contribution 4.8 10 Total 45.3 100 44. The proposed IDA Credit will finance about 40% of the estimated costs of the project. It will finance engineering, supervision (project management) and consultant services, training, drilling and completion services, materials and equipment for the five development wells, construction and installation of one monopod platform, and power generation systems and production faciiities to be installed on the integrated platform. The provision of IDA funds is justified both on project and country grounds. As indicated in para. 41, the project has suffered from financial problems in the past and the short-term outlook is still uncertain. The project definitely needs an equity injection. As Benin is itself in a strained financial situation, the equity can be provided only through concessionary financing. It should be noted that, when the US$5 million disbursed for trai;ning and preparation of the project under Credit 1207-BEN is added, the ov(erall IDA contribution to the entire Seme development scheme would represent only 13% of its total cost (i.e., including Phase I). 45. The European Investment Bank (EIB), wlhich participated in IDA's appraisal mission, would lend ECU 18 million (US$15 million equivalent). US$3.7 million equivalent would be at preferential sates ("risk capital") to cover the financing of the two confirmation weLls.! The balance of EIB financing, covering mostly the financing of production structures (two monopods and part of the integrated platform) would be under the rates stipulated in the Lome II Convention (interest rate of about 10.5%, ten-year maturity, including four years of grace). The EIB loan is scheduled to be submitted to its board in mid-June 1984. It would be a condition of effectiveness of the proposed Credit that IDA be notified by the EIB that any conditions precedent to the first disbursement under the EIB Loan Agreement, except for the effectiveness of this proposed credit, have been fulfilled (Section 6.01(c) of the draft Development Credit Agreement). As the EIB 1/ The interest rate is 1% until the well is declared productive and 7% thereafter, the principal to be repaid in ten years. If the well is dry, the debt would be cancelled.  - 15 - wishes to have its loan (i.e., excluding risk capital) repaid from the trustee account (see para. 30), it has been agreed upon in principle between Phase I lenders and the Beninese Government that the EIB, and other institutions who would request it, would be included in the existing security arrangements on a pari passu basis. 46. The Government will provide an equity contribution of US$4.8 million, about 10% of the project costs, from the internal cash generation of the Seme project. The principle of allowing disbursements from the trustee account to finance the above expenditures has been agreed upon between Phase I lenders and the Beninese Government and the finalization of the agreement would be a condition of credit effectiveness (Section 6.01(b) of the draft Development Credit Agreement). 47. The proposed IDA credit and EIB loan together with the US$4.8 million cash flow contribution will cover 83% of the financial requirements of the project. On the likely assumption that the results of the confirmation wells, to be drilled in the first stage of the project (see para. 41) prove positive, the Government of Benin and SPB have contacted suppliers and export credit agencies for financing of the remaining 17% (US$7.5 million) required to complete the construction of the integrated platform. Under these circumstances, due to the type of equipment involved, it is expected that export credit financing would be forthcoming. However, as a prudent contingency, it has been agreed upon in principle between the Government of Benin and Phase I lenders that any shortfall in export credit financing wylld be met from the trustee account, if additional reserves have been proven._ The finalization of this agreement would be a condition of credit effectiveness (Section 6.01(b) of the draft Development Credit Agreement). In the less likely event that the results of the confirmation wells are negative, the project scope would be modified. The integrated platform would not be constructed but be replaced by additional monopod platforms and related equipment. Project costs would be reduced to US$34.5 million. The reduced investment requirements, accompanied by less proven reserves and a reduced generation of revenues, would make it less appropriate for the Government of Benin to seek export credits in such an eventuality. Despite the reduction in revenue in such a case, it would still be expected that a cash flow contribution to project costs of about US$3.5 million, 10% of the project cost, should be feasible, and if so, about US$1.0 million may not have to be disbursed from each of the external funding source commitments. Procurement and Disbursements 48. The IDA-financed components for works, materials and equipment will be procured under ICB in accordance with World Bank guidelines. This will include the procurement of: (a) cement and chemicals, mud chemicals, core bits, drilling bits, tubular goods, and downhole equipment to drill the five 1/ In this case, additional production would be available from the confirmation wells, thus making possible a higher contribution from the cash flow (financial projections shown in para. 52 are based on proven reserves and therefore exclude the potential contribution of the confirmation wells).  - 16 - development wells; (b) construction and installation of one monopod platform; and (c) power generation systems and production facilities to be installed on the integrated platform. Drilling and completion services (cementing, directional drilling, electrical logging, and drilling contractor (labor only)) will be procured by extending the existing contracts available under the ongoing Phase I development project. The selection process and the terms of the contracts, estimated to cost US$4.5 million or 25% of the proposed IDA Credit, have been reviewed and are acceptable to IDA. Consultants will be selected according to World Bank guidelines. Some consultants have already been selected according to World Bank guidelines under Credit 1207-BEN, and their contracts will be extended. The EIE would finance under its own international competitive bidding procurement procedures the production facilities (two monopods and part of the integrated platform). The table below summarizes the procurement arrangements. Procurement Method (US$ Million) Extension of Project Element ICB Existing Contracts Other Total Cost 1. Drilling and Completion of Wells a) Services - 7.0 - 7.0 _ (4.cj)d/ _ (4.5) b) Materials/Equipment 7.7 - 7.7 (5.0) - (5.0) 2. Modifications to Phase I Installations 1.6 1.6 3. Production Facilities a) Monopod Structures 6.5c/ - - 6.5 (2.3) - - (2.3) b) Integrated PLatform (i) Well/Production Platform 5.5./ - 8.2 13.7 (ii) Equipment and Production Facilities 2.9 - 2.6 5.5 (2.9) - - (2.9) 4. Engineering, Supervision and Consulting Services - 3.1 3.1 (3.l)b/ (3.1) 5. Training 0.2 0.2 - - (0.2) (0.2) TOTAL 24.9 7.0 15.7 45.3 (10.2) (4.5)) (3.3) (18.0) a/ Figures in parentheses ar- the amounts financed by IDA. b/ Selected in accordance with Bank Guidelines. c/ Including international competitive bidding procedures of the European Investment Bank.  - 17 - 49. It is proposed to allow advance contracting for US$2.0 million and retroactive financing up to the amount of US$1.5 million, 8% of the IDA credit, for drilling and completion services and consulting services contracted after March 31, 1984. A condition of disbursement for the power generation systems and production facilities to be installed on the integrated platform would be that the Government and IDA have determined that, based on the results of an updated feasibility study, the installation of the integrated platform is economically justified (Schedule 1, para. 4(b) to the draft Development Credit Agreement). The project is expected to be completed by December 31, 1986. The closing date will be June 30, 1987. Project Implementation 50. The project will be implemented over the period mid-1984 to end-1986 by SPB under close Government supervision. The Government will set up a project unit composed of three professionals assisted by at least one expatriate petroleum engineer/consultant on a regular basis, and other specialized consultants as needed. The unit will report directly to the Minister of Industry, Mines and Energy. The role of the Project Unit will be on the one hand to supervise SPB's service contract and activities, including discussions of budget proposals, drilling locations, and reservoir management, and on the other hand, to serve as a liaison between the Government and SPB, financial institutions, and consultants. The precise functions and responsibilities of the Project Unit were agreed upon during negotiations. The establishment of the unit, and hiring of the staff with qualifications and experience satisfactory to IDA and of the expatriate petroleum engineer/consultant would be a condition of credit effectiveness (Section 6.01(a) of the draft Development Credit Agreement). The Government considers that the above arrangements will permit it to exercise its control over the development and exploitation of the field. Should the Government decide later to create a national oil company, it would consult with IDA on its proposed organization, financial management and operations, in particular on the proposed methods for the transfer of assets and liabilities, as agreed upon under Credit 1207-BEN (Section 3.07 of the draft Development Credit Agreement). Amendments to the service contract with SPB to cover the Phase II development are being negotiated. They include, in particular, a definition of Phase II activities and a clarification of decision-making responsibilities under the revised Phase II institutional framework (i.e., the creation of the Project Unit). The Government has also decided to renegotiate SPB's remuneration formula. A consultant is assisting the Government in these matters under financing of Credit 1207-BEN. It would be a condition of disbursement for the engineering and supervision (project management) services that the above-referenced service contract has been amended in a manner satisfactory to IDA. (Schedule 1, para. 4(c) to the draft Development Credit Agreement). It was agreed upon during negotiations that the Government would continue to employ a project management company under a service contract satisfactory to IDA (Section 3.03(a) of the draft Development Credit Agreement). Accounting, Auditing and R-porting 51. SPB has developed a commercial accounting system for the Seme project. The 1980 and 1981 project accounts and the accounts as of February 28, 1983 (date of official "project completion" according to Phase I  - 18 loan agreements) have been audited by Saga's Norwyegian external auditor. The Government has hired an international audit company to undertake a detailed audit of the project's account as of Decernber 31, 1983. This audit is financed under Credit 1207-BEN and the auditor will also train Beninese staff to audit petroleum sector accounts. The 1983 audit report would be submitted to IDA by September 17 1 984e It was agreed upon during negotiations that the future Seme project accounts and audiit report would be submitted to IDA not later than six months after the close of the fiscal year (Section 4.01(b) of the draft Development Credit Agreement). It was also agreed upon that the Government would continue to prepare the mnonthly operational reports for the Seme Project which are telexed tC all lenders and submit quarterly consolidated progress reports to IDA3 rSect:ion 3.06(c)(i) of the draft Development Credit Agreement)c Financial Evaluation 52. As indicated in para. 30, the project suffered initially from several technical setbacks which have led to a rescheduling of Phase I loans. The unsatisfactory financial performance of Phase I requires injection of equity, which will be provided by the Government through the proposed IDA credit, to Dut the project back on a sound financial footing. The financial evaluation of the project depends mostly on the production assumptions. SPB and an independent consultant- Franlab, have prepared production projections based on the proven reserves k'.e., excluding possi.ble reserves to the north and northwest of the field) which show t:hat the project would generate a sizeable surplus to the Government. The appraisal mission estimated that a much more cautious attitude is required at this stage, as experience with pump efficiency and water intrusion is insufficient to guarantee that the production rates estimated by SPB could be achieved (total recovery of about 22.5 MMB by 1992). Financial projections based on a conservative production profile prepared by the appraisal mission (total recovery of 17.7 MMB by 1992) and the price of oil remaining constant in real terms at US$26.451 indicate the project's financial condition will remain uncertain in the short term (1984-1986). The debt service coverage ratio would average 1.3 in that period. A sensitivity analysis indicates that if the price of oil remains constant in nominal terms in the years 1984-1986 the projected cash surpluses after servicing the debt would be reduced from about US$22 million to US$5 million in this period. The uncertainty on production and prices clearly justifies the injection of equity th-rough the proposed IDA Credit. The longer-term outlook is more favorable, with debt service coverage reaching a satisfactory level in the 1.8-2.0 range. The table below summarizes the project's main financial indicators. 1/ Net FOB price for the three shipments from November to February 1984. The Government of Benin has signed a one year sales contract with an American oil company. A longer term contract would be difficult to obtain under current oil market conditions.  - 19 - (US$ million in current terms) 1984 1985 1986 1987 1988-1992 Net sales 63 69 80 79 253 Operating Costs (23) (25) (28) (28) (146) Internal Cash Generation 40 44 52 51 107 Investments (14) (24) (10) - - Borrowings 6 10 6 - Equity Injection (Proposed IDA Credit) 3 12 3 - - Debt Service (27) (40) (39) (29) (54) Net Cash Flow 8 2 12 22 53 Debt service coverage 1.5 1.1 1.3 1.8 2.0 53. As it is of primary importance to follow closely the project's finances, and particularly to control operating costs, it was agreed upon during negotiations that the Government would submit to IDA for its review and comments (i) the annual operating and investment budgets at least two months before the beginning of each fiscal year; and (ii) the drilling program, including recommendations for detailed drilling locations at least one month before the drilling of each well (Section 3.06(c)(ii) of the draft Development Credit Agreement). Moreover, it was agreed upon during negotiations that the Government would introduce competitiveness when contracts with existing service suppliers expire with a view to minimize project operating costs (Section 4.03 of the draft Development Credit Agreement). Benefits and Risks 54. The economic benefits of the project are measured in terms of incremental exports of crude (about 5.2 MMB) resulting from the implementation of Phase II. On the assumption that crude prices would remain constant in real terms at US$26.45/Bbl, the economic rate of return (ERR) for the project is about 60%. This high rate of return results from the fact that most of the required production infrastructure already exists, which allows rapid production from the first wells to be drilled, and from the fact that a great part of the operating costs are fixed. The Phase II project would make the overall Seme oil field development project more economical to the Government (ERR of 11%). An analysis of the sensitivity to alternative pessimistic assumptions (15% decrease in revenues, 15% increase in costs) indicates that under all such scenarios the ERR of the Phase II project would remain above the cost of capital in Benin. If the project scope is modified (see para. 47), the ERR would be slightly higher (73%). While production projections would remain identical (they are based on proven reserves only), the investment requirements would be reduced by about US$11 million. 55. The risks associated with the project are those inherent in petroleum production. These concern particularly the drilling of dry wells, operating problems such as malfunction of downhole pumps, water and sand production, and possible improper reservoir management. These risks are acceptabLe as development and operating experience has been gained on the field since June 1982, and steps have been taken to minimize further uncertainties. They include a 3-D seismic survey to better locate wells, an independent reservoir engineering study, technical assistance from pump manufacturers, and provision  - 20 - of consultants for close technical supervision of SPB. There is a financial risk in the short term evidenced by the relatively low debt service coverage ratio of the project. The short-term risk depends mostly on production and oil prices hypotheses and a careful monitoring of the project finances will be required to prevent financial difficulties. Environmental Considerations, Safety and Insurance 56. All precautions will continue to be taken to avoid undue damage to the natural environment. Minor, nonpermanent effects cannot be avoided completely, e.g., some small amounts of well cuttings and mud would likely be dispersed in the sea water. Substantial environmental damage can only occur in the event of a serious oil spill resulting from a well blow-out. Such an occurrence is unlikely as the wells would be drilled under close control at all times. SPB has been training all its staff in fire prevention and security matters and will continue to do so on a regular basis, in accordance with industry practices. The overall safety record on the project has been good. The project carries adequate comprehensive insurance on all its facilities and equipment against fire, blow-outs and other kinds of damage and the insurance policies will be extended to cover the Phase II development. All offshore facilities have been certified for commercial operation by Det Norske Veritas. PART V - LEGAL INSTRUMENTS AND AUTHORITY 57. The draft Development Credit Agreement between the People's Republic of Benin and the Association and the Recommendation of the Committee provided for-in Article V, Section l(d) of the Articles of Agreement of the Association are being distributed separately to the Executive Directors. 58. Features of the draft Development Credit Agreement of special interest are referred to in the text of this report and are listed in Section III of Annex III. Special conditions of credit effectiveness would be: (i) that the Phase 1 lenders would have concluded agreements, acceptable to IDA, on debt rescheduling, including provisions to allow disbursements from the trustee account for the financing of some of the Phase II expenditures; (ii) that the Government would have established and staffed the project unit and hired an expatriate petroleum engineer; (iii) that IDA be notified by the EIB that any conditions precedent to the first disbursement under the EIB Loan Agreement, except for the effectiveness of the IDA Agreement, have been fulfilled; and (iv) that the Convention CoLlective regulating salaries in the petroleum sector has been signed (Section 6.01 of the draft Development Credit Agreement). Special conditions of disbursements would be (i) for power generation systems and production facilities to be installed on the integrated platform, that IDA and the Beninese Government have determined that, based on the results of an updated feasibility study, the installation of the integrated platform is economically justified; and (ii) or project management services, that the service contract with SPB has been amended in a manner satisfactory to IDA (Schedule 1, paragraphs 4(b) and (c) to the draft Development Credit Agreement).  - 21 - 59. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 60. I recommend that the Executive Directors approve the proposed credit. A. W. Clausen President Attachments Washington, D.C. May 30, 1984  -22- ANNEX 1 Page I of 4 BENIN BENIN - SOCIAL INDlCATORS DATA SKEET BENIN REFERENCE GROUPS (WEIGHTED AVERAGES) la HOST (MOST RECENT ESTIMATE) lb b RECENT b LOW INCOME hIDDLE INCOME 1960/1b 1970'k ESTIMArE/- AFRICA S. OF SAHARA AFRICA S. OF SAHLAR ARA (TELOUSAMD SQ. Di) TOTAL 112.6 112.6 112.6 AGRICULTURAL 19.8 20.4 22.4 GNP PEE CAPITA (USS) 100.0 140.0 320.0 254.6 1147.9 ENERGY CONSUMPTION MR CAPITA (KILOGRAMS OF COAL EQUIVALENT) 38.0 55.0 7J.0 79.8 724.2 POPULATION AND VITAL STATISTICS POPULATION,MID-YEAR (THOUSANDS) 2U50.0 2659.0 3595.0 URBAN POPULATION (X OF TOTAL) 9.5 12.6 14.b 19.5 28.5 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILL) 6,8 STATIONARY POPULATION (MILL) 24.6 YEAR STAIrONARY POP. REACHED 2135 POPULATION DENSITY PER SQ. KQM. 18.2 23.6 30.9 29.5 56.5 PER SQ. EY. AGRI. LAND 103.4 130.2 155.5 94.1 131.8 POPULATION AGE STRUCTURE (2) 0-14 YRS 44.1 45.3 46.1 45.0 45.9 15-64 YRS 53.3 52.0 51.1 52.1 51.2 65 AND ABOVE 2.6 2.7 2.8 2.9 2.8 POPULATION GROWTH RATE (X) TOTAL 2.2 2.6 9 .7 2.8 2.8 URBAN 5.8 5.4 4.1 6.2 5.3 CRUDE BIRTH RATE (PER THOUS) 50.6 49.3 49.0 47.9' 47.6 CRUDE DEATH RATE (PER THOUS) 26.8 22.1 17.1 19.2 15.2 GROSS REPRODUCTION RATE 3.3 3.3 3.2 3.2 3.2 FAMILY PLANNING ACCEPTORS, ANNUAL (TROUS) USERS (2 OF MARRIlD WOMEN) .. .. FOOD AND NIUTRITION INDEX OF FOOD PROD. PER CAPITA (1969-71-100) 95.0 101.0 92.0 87.8 95.7 PER CAPITA SUPPLY OF CALORIES (X OP REQUIREMLENTS) 100.0 97.0 103.0 88.0 97.1 PROTEINS (GRAMS PER DAY) 55.0 54.0 54.0 51.2 56.0 OF WH8CII ANIMAL AND PULSE 15.0 15.0 13.0/c 18.1 17.2 CIIILD (AGES 1-4) DEATH RATE 49.0 41.2 33..2 25.7 23.6 HEALTH LIFE EXPECT. AT BIRTH (YEARS) 37.2 42.1 49,9 47.4 51.9 INFANT MORT. RATE (PER TLOUS) 205.6 179.4 152.1 126.5 117.6 ACCESS TO SAFE WATER (%POP) TOTAL .. .. 2L.U 24.7 25.4 URBAN .. .. 52.0 56.B 70.5 RURAL ,. .. 16.0 18.3 12.3 ACCESS TO EXCRgTA DISPOSAL (X OF POPULATION) TOTAL '' 14.0 ,, 2d.1 URBAN .. 83.U .. 65.7 RURAL .. I.U .. 21.9 POPULATION PER PEYSICIAN 23030.0 28590.o 17050.U 2742U.6 12181.o POP. PER NURSING PERSON . 2700.O/d 2870.0 1670.0 3456.2 2292.U POP. PER HOSPITAL BED TOTAL 150.0 850.0 73O.O/c 1183.2 1075.4 URBAN 540.0 230.0 390.(7E 380.6 4U2.3 RURAL 780.0 2200.0 1120.0/c 3177.5 3926.7 ADMISSION'S PER HOSPITAL BED .. 30.2 17.7/e ROUSING AVERAGE SIZE OF HOUSEHOLD TOTAL .. .. URBAN .. .. RURAL .. .. AVERAGE NO. OF PERSONS/ROOM TOTAL .. .. URBAN .. .. .. RURAL .. .. ACCESS TO ELECT. (. OF DWELLINGS) TOTAL .. .. URBAN .. .. RURAL ' '_  -23~ ANNEX 1 Page Z uf 4 BENIN - SOCIAL INDICATORS DATA SHEET BENIN REFERENCE GROUPS (WEIGHTED AVERAGES) /a MOST (MOST RECENT ESTIMATE) lb /b 1 Lb RECENTIb LOW INCOME MIDDLE INCOME 1960./- 197 ESTIMATE' AFRICA S. OF SAHARA AFRICA S. OF SAHARA muuc&rou ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 27.0 40.0 62.0 63.9 97.2 MALE 38.0 55.0 84.0 - 73.6 103.1 FEMALE 15.0 25.0 39.0 51.6 88.5 SECONDARY: TOTAL 2.0 6.0 16.0 12.5 17.2 MALE 2.0 8.0 23.0 16.7 23.5 FEMALE 1.0 3.0 8.0 8.1 14.2 VOCATIONAL (T OF SECONDARY) 12.9 4.1 8.1 7.3 5.2 PUPIL-TEACHER RATIO 5' PRIMARY 41.0 44.0 48.0 46.4 42.9 SECONDARY 23.0 25.0 31.0/e 25.1 23.7 lADULT LITERACY RATE (1) 4.6 11.0/i 27.9 36.5 37.1 C8T 0IiOu PASSENGER CARS/THOUSAND POP 1.4 4.6 5.5/f 3.3 18.8 RADIO RECEIVEKS/THOUSANU POP 12.2 32.0 71.9 45.3 97.8 TV RECEIVERS/THOUSAND POP .. .. 0.1 2.2 18.6 NEWSPAPER (-DAILY GENERAL INTEREST-) CIRCULATION PER THOUSAND POPULATION 1.5 0.8 0.3 4.7 18.2 CINEMA ANNUAL ATTENDANCE/CAPITA 0.2 0.5 0.3/f i.0 0.6 LA-9 iOM TOTAL LABOR FORCE (fHOUS) 1049.0 1292.0 1621.0 FEMALE (PERCENT) 45.4 45.1 45.3 34.5 36.1 AGRICULTURE (PERCENT) 54.0 50.0 46.0 76.9 56.8 INDUSTRY (PERCENT) 9.0 12.0 16.0 9.8 17.5 PARTICIPATION RATE (PERCENT) TOTAL 51.2 48.6 45.1 40.9 37.0 MALE 57.1 54.3 51.4 53.0 47.1 FEKALE 45.5 43.1 39.3 28.9 27.0 ECONOMIC DEPENDENCY RATIO 0.9 1.0 1.1 1.2 1.3 IK= DISTUIWTTIO PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5Z OF HOUSEHOLDS 31.4/R .. HIGHEST 201 OF HOUSEHOLDS 51.7. LOWEST 2ZO OF liOUSEHOLDS 5.5./. LOWEST 401 oF HOUSEHOLDS 15.87j .. POVT T&in GROUPS ESTIMATED ABSOLUTE POV