Somalia - Afgoy Gas Delineation Project

Document of The World Bank FOR OMCIAL USE ONLY UqPwt No. P-3684-SO REPORT AND RECOMENATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 17.5 MIlLION TO THE SOMALI DEMO CRATIC REPUBLIC FOR TEE AFGOY GAS DELINEATION PROJECT April 10, 1984 This document b-s a restricted distrilatdm and may be used by recipient ony in She perfoImzae of dhir offida dute lb cents may Not rwe be disosed witho Wrl Bnk sliidon. I  l~~~~~~~ CURRENCY EQUIVALENTS Unit = Somali Shilling (So. Sh.) So. Sh. 1.00 = US$0.057 US$1.00 = So. Sh. 17.50 ABBREVIAIIONS AND ACRONYMS DMH = Department of Mines and Hydrocarbons EIB = European Investment Bank ENEE = Ente Nazionale Energia Electrica (the national power company) - - = Ministry of Mineral and Water Resources WEIGHTS AND MEASURES BCF = billion cubic feet BD = barrels per day BTU = British thermal unit CIF - cost, insurance, freighpt ECU = unit of account GWh = gigawatt hour KWh = kilowatt hour LPG = liquid petroleum gas MCF = thousand cubic feet MNCF - million cubic feet MNCFD - = million cubic feet per day MT = metric ton mw = megawatt psi = pounds per square inch TOE = tons of oil equivalent tpy = tons per year GOVERNMENT OF SOMALIA FISCAL Y%AR January 1 - December 31  FOR OFFICIAL USE ONLY SOMALI DEMOCRATIC REPUBLIC Afgoy Gas DeLineation Project Credit and Project Summary Borrower: Somali Democratic Republic Amount: SDR 17.5 million (equivalent to approximately US$18 million) Beneficiary: Ministry or Mineral and Water Resources Terms: Standard Cofinancing: ECU 7 million (US$5.5 million equivalent) loan from the European Investment Bank (EIB), on the following terms: (a) 15 years including five years of grace; Cb) 1 percent rate of interest, to be increased to the EIS subsidized rate (maximum 8 percent per annum) from the time of commercial gas production. Objective: To carry out the first phase of a two-stage program including appropriate institutional development aad support, for the development of the gas reserves at Afgoy for use in the nearby Mogadishu area. Project Description: The project includes: (a) The drilling of two delineation/production weLls on the Afgoy structure and (if found necessary) the re-entry and completion as a producer of the Afgoy-l well; (b) Drilling management (60 man-months) to prepare and manage the drilLing operations as the owner's representative; (C) Petroleum technical consultants (12 man-months). A petroleum consulting firm would provide during the period of drilling a well-site geologist and a petroleum engineer for testing; (d) Preparatory studies and detailed engineering for the subsequent Afgoy Gas Development Project (17 man-mon.hs); This docment has a restricted distribution and may be used by recipients only in the perfcrmance of their official duties. Its contents may noL otherwise be disclosed without World Bank authorization.  - ii - (e) A power planning and gas utilization study (18 man-months); and (f) Assistance to the Ministry of Mineral and Water Resources in the form of (i) equipment and training; and (ii) the cost of the audit of the drilling operation by a qualified international auditing firm. Benefits: The project would delineate the gas resources to provide a domestic energy source near the capital city of Mogadishu, replacing imported fuel. Risks: The principal risk for the project is that the drilling of one or more wells might suffer from technical problems or that insufficient gas would be found. These risks are inherent in any delineation drilling, but are being reduced as much as possible by detailed preparatory work including the seismic already completed; careful choice of locating the wells; and hiring of an experienced drilling management company to undertake detailed drilling programs to be approved by IDA. Estimated Costs: US$ Million Local Foreign Total Ci) Drilling Rig costs 0.2 5.0 5.2 Materials and supplies 0.1 5.9 6.0 Transport - 0.3 0.3 Ancillary services - 4.6 4.6 Drilling. management 0.2 1.3 1.5 Subtotal 0.5 17.1 17.6 (ii) Technical Assistance 0.1 0.3 1.4 (iii) Studies and Project Preparation 0.1 0.5 0.6 (iv) Training, Equipment and Audit 0.1 0.4 0.5 Base Cost 0.8 18.4 19.2 (v) Physical Contingencies 0.2 3.7 3.9 (vi) Price Contingencies (vii) PPF Refinancing_ 1.0 1.0 Total Cost 1.0 23.5 24.5  - iii - US$ Million Local Foreign Total Financing Plan: IDA - 18,000 18,000 European Investment Bank - 5,500 5,500 Government of Somalia 1,000 - 1,000 TOTAL 1,000 23,500 24,500 Estimated IDA Disbursements: FY85 FY86 FY87 Annual 14,000 3,500 500 Cumulative 14,000 17,500 18,000 Rate of Return: A minimum of 17 percent (for gas development program as a whole). Staff Appraisal Report: N. A. Maps: IBRD No. 17734 and 17735  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 17.5 MILLION (US$18.0 MILLION) TO THE SOMALI DEMOCRATIC REPUBLIC FOR THE AFGOY GAS DELINEATION PROJECT 1. I submit the following report and recommendation on a proposed credit to the Somali Democratic Republic for SDR 17.5 million (US$18.0 million equivalent) to help finance the Afgoy Gas Delineation Project. The European Investment Bank has agreed to co-finance the project with a loan of US$5.5 million equivalent, on terms and conditions discussed in para. 52. PART I - THE ECONOMY 1/ 2. A report on the economy entitled: 'Somalia - Policy Measures for Rehabilitation and Growth- (Report No. 4081a-SO) was distributed to the Executive Directors in May 1983. An Agricultural Sector Review in three volumes (Report No. 2881a-SO) was distributed to the Executive Directors in June 1981. Country data sheets are provided in Annex I to this report. The Resource Base 3. Somalia is a large, sparsely populated country; its varied topography includes a hot and arid coastal plain, rugged mountains and plateaus, and lowlands of varying fertility and rainfall. Its population of about 5 million (including 400-500,000 refugees) is unevenly distributed over a land area of nearly 630,000 sq km of semi-desert. Population growth in recent years has been approaching 3 percent (excluding refugee inflows) which will result in long-term pressure on the fragile resource base. Only about 13 percent of the land is suitable for cultivation, but with water the limiting constraint, only a small fraction (8.5 percent) of this potentially arable land is cultivated. 4. The mainstay of the economy has long been nomadic pastoralism. Over 60 percent of the people depend on livestock for their livelihood; about 20 percent are farmers; and 20 percent are engaged in various agricultural operations. Livestock production accounts for about 35 percent of GDP and provides over 80 percent of export earnings. Crop production generates about 10 percent of GDP. Although Somalia has one of the longest coastlines (3,000 km) in Africa, fishing generates only about 2 percent of both GDP and employment. 1/ This text is identical to the one in the President's Report for the Fisheries Exploration/Pilot Project, dated April 10, 1984.  - 2 - 5. The country's limited natural resource base and its uncertain energy potential account for the scarcity of economically viable investment opportunities. Apart from the traditional export of livestock, commercial agriculture is centered mainly on the production and export of bananas (in which foreign concession holders are important) and the production of sugar for the domestic market. Expansion of the manufacturing and service sectors is limited by the small size of the domestic market, poor infrastructure, and shortages of capital and entrepreneurial experience. The existence of several minerals has been confirmed, but their exploration is still at an early stage, and the commercial viability of production remains to be proved. 6. A number of foreign companies have been engaged in inshore and offshore exploration of hydrocarbons but so far no commercially viable oil prospects have emerged. However, investigations under an IDA project for petroleum exploration promotion have indicated possible natural gas reserves near Mogadishu which could be used for power generation in substitution for petroleum imports. In the absence of other known resources, Somalia's prospects depend upon agricultural and livestock development, whose progress will depend upon careful management of the scarce land and water resources. 7. Somalia is among the poorest countries in the world and is classified by the United Nations as a least-developed country. Per capita income was estimated to be below $300 in 1981. Other indicators of the country's low level of social and economic development include: a crude death rate estimated at 25 per thousand population (compared to a crude birth rate of 48 per thousand); an average life expectancy of only 40 years; an infant mortality rate as high as 150 per thousand population; primary and secondary enrolment ratios of 50 percent and 7 percent, respectively; and a ratio of nearly 20,000 persons per physician. Past Development Strategy and Performance 8. Following its assumption of power in 1969, the Government adhered to a program of 'scientific socialism' whose stated objectives were egalitarianism and social justice, development through the public sector, nationalization of certain foreign enterprises, and the formation of cooperatives. Public ownership and management expanded both through nationalizations and througn the creation of new public enterprises. The parastatal sector established in the 1970s included about 45 autonomous agencies which eliminated private enterprise in wholesale trade and banking and which dominated manufacturing. The 1974-78 development plan and the 1979-81 development plan were essentially public investment programs that allowed for only a few small private ventures. Although the plans provided a needed impetus to investment, they did not play a major role in the allocative process. Despite the Government's initial intentions, industry and infrastructure, especially transport and communications, received more public investment than agriculture. At the same time, public enterprises operated without firm Government control, owing largely to weak management and inadequate monitoring.  9. In the early 1970s, Somalia made considerable progress in meeting certain basic needs. A program of literacy and primary education had noticeable results, and an effective system of food distribution was also established. In other respects, however, the record in the social sectors has been less impressive, particularly in water supply, sanitation and health where services have frequently been biased in favor of the urban population. Moreover, there are indications that there has been a trend towards increasing income differentiation within the rural sector. 10. On the production side, provisional national accounts data show that between 1972 and 1978, Somalia's GDP grew in real terms by 2.8 percent per annum, at approxiuately the same rate as population. On average, the productive sectors grew much more slowly - by only one percent -- as compared to the growth of the services sector at about 7 percent, reflecting to a large extent increased Government employment. Within the productive sectors, the average annual growth was 2.7 percent in livestock, minus 3 percent in crop production, and minus 2 percent in industry. Comparable national accounts for 1979-1982 are not yet available, but indicators suggest that an upturn in value added in crop production occurred in 1981 and 1982, due to unusually favorable rainfall which stimulated the output of maize and sorghum, and partly owing to improved incentives provided by increased producer prices made effective in April 1981. In recent years, Somalia's dependence on food imports to meet its growing consumption needs has increased; food imports now account for one-third of total requirements. The growth of other sectors however, continued to be stagnant. 11. About 100,000 Somalis have migrated to work in neighboring oil-exporting countries in the Gulf area. As labor migration has been neither organized nor controlled by the Government, it has led to a severe depletion of Somalia's already small stock of qualified and skilled manpower, thereby weakening institutions and reducing the country's absorptive capacity. The savings of these emigrants are potentially an important resource for the economy, but despite substantial adjustment of the exchange rate, only a small proportion of emigrants' savings is remitted, largely through unofficial channels. 12. Following the border conflict of 1977/78, there was a great surge in Government expenditures which resulted in widening of deficits in both the budget and the balance of payments. During 1978-80, the Government's financial situation deteriorated rapidly, mainly because of the sizeable expansion in expenditures consequent upon the border conflict, the cost of maintaining large numbers of refugees, and the wage bill associated with the Government's policy of guaranteeing employment for secondary school leavers. At the same time, official foreign aid declined. This resulted in Government recourse to deficit financing. With further deterioration in the budgetary situation in 1979 the Government's recourse to the Central Bank rose to record levels (about 13 percent of GDP). This, in turn, led to rapid inflation, from 10 percent in 1978 to 60 percent in 1980.  - 4 - 1981, the Government began to take substantial remedial action, and successfully implemented two successive stabilization programs, which were both supported by IMF Standby arrangements. The core of these measures comprised adjustments of the exchange rate, fiscal and monetary restraints, and de facto liberalization of agricultral marketlng. As part of stabillzation under the first Standby program, a dual exchange rate was introduced which meant a substantial devaluation of the Somali shilling. Producer prices for agricultural crops were increased, while banana growers received the full benefit of devaluation. The program stipulated a substantial reduction in Government recourse to the banking system, and this was achieved. The Government also increased interest rates. 18. Following the completion of the 1981/82 program, the Government adopred a new stabilization program in mid-1982, supported by the IMF wlth a SDR 60 million 18-month Standbv arrangement for the period July 1982-December 1983. Under this program, several key policy measures were taken: the dual exchange rate was unified on July 1, 1982, the Somali shilling was further devalued, and interest rates were further raised. The Governwwnr also agreed further to restrict fiscal and monetary expansion. Furthermore, in January 1983, the Government introduced a bonus scheme providing for a premium of 25 percent in foreign exchange terms of inward remittances and capital inflows by Somali nationals. These actions were reinforcece in mid-1983, when Somalia introduced a more flexible exchange rate system. Under the new arrangement the Somali shilling was pegged to the SDR adjusted by the relative rates of inflation between Somalia and the five countries in the SDR basket. However, the beneficial effects of these measures have so far been overshadowed by the negative impact of a ban on Somali cattle imports by Saudi Arabia (which has been in effect since May 1983) and by the impact of a drought in 1983. 19. In a recent courageous action, the Government decided to abandon its policy of guaranteed employment to high school leavers. An interministerial committee is looking into the future of public enterprises; the Committee's report and recommendations are likely to become available soon. The Government has also taken some steps to liberalize the economy, particularly by de facto eliminating Government monopsony grain purchases. 20. The policy reforms introduced by the Government in the past three years are quite significant and they had a positive impact on the economy by reducing the rate of growth of the money supply, Government recourse to the banking system, and the rate of inflation. These measures, which also resulted in increasing commodity production and exports, represent the first stage in the formulation and implementation of a policy agenda which must be directed simultaneously at restoring financial equilibrium, rehabilitating and making fuller use of existing agricultural and industrial productive capacity, and establishing the foundations of long-term growth. 21. In March 1983 the Government requested the Bank to organize a first Consultative Group meeting for Somalia and accepted the Bank's recommendation that it prepare a Medium Term Recovery Program (MTRP) to be  presented to the Consultative Group meeting. As outlined by the Government and subsequently elaborated in a government paper entitled "Development Straregy and Public Investment Programme for 1984-86", the MTRP consists of 1981, the Government began to take substantial remedial action, and successfully implemented two successive stabilization programs, which were both supported by IMF Standby arrangements. The core of these measures comprised adjustments of the exchange rate, fiscal and monetary restraints, and de facto liberalization of agricultral marketing. As part of stabilization under the first Standby program, a dual exchange rate was introduced which meant a substantial devaluation of the Somali shilling. Producer prices for agricultural crops were increased, while banana growers received the full benefit of devaluation. The program stipulated a substantial reduction in Government recourse to the banking system, and this was achieved. The Government also increased interest rates. 18. Following the completion of the 1981/82 program, the Government adopted a new stabilization program in mid-1982, supported by the IMF with a SDR 60 million 18-month Standby arrangement for the period July 1982-December 1983. Under this program, several key policy measures were taken: the dual exchange rate was unified on July 1, 1982, the Somali shilling was further devalued, and interest rates were further raised. The Government also agreed further to restrict fiscal and monetary expansion. Furthermore, in January 1983, the Government introduced a bonus scheme providing for a premium of 25 percent in foreign exchange terms of inward remittances and capital inflows by Somali nationals. These actions were reinforced in mid-1983, when Somalia introduced a managed floating exchange arrangement based on a peg to the real SDR. However, the beneficial effects of these measures have so far been overshadowed by the negative impact of a ban on Somali cattle imports by Saudi Arabia (which has been in effect since May 1983) and by the impact of a drought in 1983. 19. In a recent courageous action, the Government decided to abandon its policy of guaranteed employment to high school leavers. An interministerial committee is looking into the future of public enterprises; the Committee's report and recommendations are likely to become available soon. The Government has also taken some steps to liberalize the economy, particularly by de facto eliminating Government monopsony grain purchases. 20. The policy reforms introduced by the Government in the past three years are quite significant and they had a positive impact on the economy by reducing the rate of growth of the money supply, Government recourse to the banking system, and the rate of inflation. These measures, which also resulted in increasing commodity production and exports, represent the first stage in the formulation and implementation of a policy agenda which must be directed simultaneously at restoring financial equilibrium, rehabilitating and making fuller use of existing agricultural and industrial productive capacity, and establishing the foundations of long-term growth.  - 6 - 21. In March 1983 the Government requested the Bank to organize a first Consultative Group meeting for Somalia and accepted the Bank's recommendation that it prepare a Medium Term Recovery Program (MTRP) to be presented to the Consultative Group meeting. As outlined by the Government and subsequently elaborated in a government paper entitled "Development Strategy and Public Investment Programme for 1984-86", the MTRP consists of (i) a program of phased policy measures aimed at restoring equilibrium in the balance of paymen..s and public finances and at rationalizing the pricing and incentive structure; and (il) a resource-constrained Public Investment Program for the period 1984-86. The formulation of this recovery program represented a major accomplishment on the part of the Government. 22. The inaugural meeting of the Consultative Group for Somalia was g held on October 26-28, 1983. Participants were encouraged by the remedial measures taken by the Government under the stabilization programs supported by the IMF and by the Government's pursuit of its new policy path. In particular, the participants appreciated the formulation of the Public Investment Program and the emphasis in the program on rehabilitation and improved utilization of existing facilities. The participants welcomed the substantial adjustments made by the Government in the size and composition of the investment program at the Consultative Group meeting. These adjustments included postponing some new projects (including the Bardhere dam and associated investments, pending results of new studies), rephasing the implementation of ongoing projects and introducing new high-priority schemes such as the rehabilitation of irrigation in the Shebelli region. Participants at the meeting favorably responded to the external aid requirements of the public investment program and other elements in the recovery program for 1984-86. It was recognized at the meeting that further financial aid to Somalia should be on highly concessional terms and that Somalia should attempt to secure debt relief on concessional terms. 23. Since the Consultative Group meeting, intensive discussions between the Government and donors have been held concerning follow-up action on the development of the Juba Valley, including the proposed Bardhere Dam, and agreement was recently reached with the Bank on terms of reference and a timetable for a study of interim water solutions. After effectively implementing during the last three years two successive Stand-by Arrangements, the Government approached the IMF for further balance of payments support under an Extended Fund Facility (EFF) to deal with the country's structural and short- to medium-term financial problems. Agreement in principle on such a program was reached in early 1984. However, in February the Government decided not to implement certain key measures. Discussions during the visit of a recent Fund mission indicated that, although the Government accepts these measures in principle, it is reluctant to implement some important ones at the present time when the country is facing serious difficulties. 24. The condition of the Somali economy, after having improved markedly between mid-1981 and late 1983, has in recent months come under increasing stress. It appears, moreover, that the renewed financial and balance of payments difficulties which the country is now experiencing may wel'l intensify in the course of coming weeks and months. This situation has emerged from (i) the acute shortage of foreign exchange due to the fall  - 7 - in livestock exports (consequent upon a ban on Somali cattle inports by Saudi Arabia), a probable shortfall in grant receipts and the Government decision not to go 4head with the IMP program ar thls time; (Li) a drop In domestic food produiction owing to the current drought situation; and (11i) a prospective shor:fall in Government revenues which could lead to either distruptive cutbacks in lnvestment and current expenditures or to an acceleration in credit and money supply, or some combination thereof. These developments are resulting In a rising rate of Inflation and a rapidly falling exchange rate in the parallel market. If corrective measures are not taken soon, a renewed economic and financial crisis could ensue, A Bank economic mission, scheduled to visit Somalia thli spring, will review the current economic and flnanclal situation and prospects. PART II - BANK GROUP OPERATIONS IN SOMALIA 25. Since 1970, IDA has extended 24 credits to Somalla, amounting to about US$193 million, of which roughly thirty percent has been for agriculture, twenty five percent for transport and the rest Is about equally divided over educatlon, water supply, ports, energy, industry and technical assistance. Over the last three years annual commitments have risen from $10 million in 1981, to $15 million in 1982 and $23 million 1983. IFC has so far made one Investment In Somalia -- a $375.000 loan in 1981 for a molasses terminal for the Juba Sugar Project. IFC is noW focusing its attentlon on export-oriented projects. In recent years, the Abu Dhabi Fund, African Development Fund, Arab Fund, IFAD, Islamic Development Bank, EEC, Kuwait Fund, Saudi Fund, and USAID have co-financed projects in Somalia with IDA. 26. Physical progress in Implementing IDA projects has been mixed; agriculture projects have not always done well, with the exception of the North West Agriculture Project. Projects for roads, ports, water and education have in general been executed expeditiously. Most projects have included expatriate technical assistance, while also benefitting from regular supervision missions, follow-up through the resident misslon, and annual country implementation reviews. The disbursement rate under the projects has improved appreciably in recent years from about 15 percent in FY79 to about 24 percent in FY83; this compares very favorably with the Bank-wide average of 21 percent. The Government's Pro4ect Implementation Unit which was set up in the Planning Ministry in 198... and the more recent Monitoring and Evaluation Unit contributed notably to this encouraging trend. 27. The Bank assistance strategy for Somalia is to encourage and assist the Government in the formulation and implementation of rolling medium-term recovery programs directed simultaneously at restoring financial equilibrium and rehabilitation and making fuller use of exlsting capacity, and at establishing the foundations of longer-term growth. The Bank's economic and sector work for Somalia is designed to assist in developing an adequate data base and improvements in macro-economic management. Two other projects are In ao advanced stage of preparation, namely the Fisheries Exploration/Pilot Project, which will be presented to the Executive Directors on a date to be determined and a proposed Second Technical Assistance project, which was recently appraised.  -8- PART III - THE ENERGY SECTOR 28. Resources. Somalia's energy endowment is potentially significant, but identified resources are modest. Forests covering about 130,000 km2 are the main domestic energy source, but indiscriminate use and lack of reforestation have resulted in serious depletion and ecological damage. Due to low rainfall and irregular water flow in the country's rivers, the Shebelli and Juba, the hydro potential does not exceed 100 MW. No commercial hydrocarbon reserves have yet been proven to exist, except for the Afgoy gas-bearing structure near Mogadishu. Oil shale deposits and small occurrences of coal, both in northern Somalia, appear to be of little economic value. Deposits of uranium estimated at 8,500 metric tons (MT) (with a U3308 content of less than 0.1 percent) have been discovered in the Mudug Valley. Among other energy sources, bagasse from sugarcane is used to a minor extent for steam and electricity generation in captive plants. There also appears to be wind and solar energy potential, but this has not been investigated to any significant degree. 29. Like all statistics in Somalia, data on energy output and demand are scarce and unreliable. According to preliminary estimates, the gross domestic output of primary energy in 1982 was about 1.16 million tons of oil equivalent (TOE), consisting almost entirely of fuel wood and charcoal and a small proportion of agricultural wastes. Energy consumption, inclusive of imported energy, but net of transformation and transmission losses,-is estimated at 1.14 million TOE or 0.28 TOE per capita, which is low even by African standards. 73 percent is provided by fuel wood, with charcoal contributing an additional. 7 percent, and agricultural wastes, 3 percent. Petroleum imports account for only 17 percent of final energy consumption. Commercial energy consumption has grown fast at 14 percent per annum throughout the 1970s and early 1980s. Electricity is supplied through isolated systems to Mogadishu, five provincial towns, and a number of villages. It is entirely based on fuel oil and diesel-fired generation although a 5 MW hydropower plant located on the Shebelli river will soon be commissioned. Total installed capacity in 1982 (including captive generation) is estimated at about 60 MW and consumption at less than 90 CGh (22 KWh per capita); this is among the lowest consumption levels in sub-Saharan Africa. 30. Institutions. The responsibility for the energy sector is divided among a number of Government institutions. The Ministry of Mineral and Water Resources (MMW) is in charge of developing mineral fuels, including petroleum, as well as hydrological resources. The Ministry of Commerce supervises the National Petroleum Agency, which imports, transports and distributes petroleum products. The Ministry of Industry oversees the petroleum refinery, jointly owned by the Somali and Iraqi Governments, and the state-owned industrial enterprises, some of which have their own power generation facilities. The Ministry of Public Works supervises the main power utility, Ente Nazionale Energia Electrica (ENEE), and the Ministry of Livestock, through its-National Range Agency, is responsible for forestry development. The Economic Commission of the Presidency of the Republic is instrumental in setting energy prices and in approving energy sector investment. Energy sector management and planning has been weak because of the prevailing dilution  - 9 - of responsibilities and lack of coordination among energy sector institutions, compounded by shortages of basic data and of competent personnel. However, the Gevernment has now agreed to a Bank/UNDP energy assessment (para. 34). 31. Pricing. Prices of petroleum products, electricity, and charcoal are Government-controlled. Whereas during the 1970s prices were held at artificially low levels involving at times substantial subsidies to consumers, the Government over the last two years has succeeded in fully covering the costs of providing energy to consumers, and at applying energy pricing as an instrument to dampen growth of energy demand. In January 1983, consumer prices adjusted by end-use efficiency were between US$0.67 and US$1.38 per million BTU for charcoal (at official and parallel market prices, respectively), US$0.81 for LPG, US$2.37 for kerosene and around US$7.00 for electricity. Petroleum product prices have been changed relatively frequently in line with international (CIF) petroleum prices and exchange rate movements. They were increased in 1980-81 by over 200 percent, on weighted average, and preferential prices for certain consumer groups were eliminated. Fuel taxes as a share of consumer prices have also been increased and now range from 21 percent on kerosene to 46 percent on gasoline. 32. As a result of this poLicy, the prices on petroleum products cover at least the full cost of imports (border prices) as well as domestic costs of distribution, and internal transport cost differentials are fully reflected in consumer prices. Electricity tariffs were increased in early 1982 by more than 100 percent. They now amount to So. Sh. 2.0/KWh (USc/11.4) for industrial consumers and So. Sh. 2.80/KWh (USc116.0) for residential consumers and are sufficient for ENEE to achieve financial balance. Official charcoal prices at So. Sh. 70/MT are low in relation to the non-controlled fuel-wood price and do not cover the long-run marginal cost of reforestation. However, prices on the parallel charcoal markets, which serve the private consumers, are considerably above the largely ineffective official price, which is applicable normally for the public sector. 33. Energy Investments. Energy-related investments in past years have been relatively low. Including resource surveys and energy sector studies, Government capital expenditure during 1974-82 totaled about US$70 million, or less than 10 percent of public investment over this period. The bulk was for the expansion of the Mogadishu power generation system and construction of the refinery which was financed by Iraq. Government expenditures on petroleum exploration have become somewhat more important since 1981, with the activities financed under the IDA Petroleum Exploration Promotion Project (Credit 1043-SO), which is discussed in paras. 40 and 43. Exploration expenditures are Largely committed by foreign companies, which are estimated to have spent close to US$100 million in the period 1980-1983.  - 10 - 34. The =nbitious nature and unclear economics of major portions of the Government's long-term energy investment program indicate the need for a more systematic approach to energy planning. In this regard, an energy sector study has been financed under Credit 1043-SO. It compiles data, evaluates development options and formulates recommendations on future energy policies. The study will also serve as a basis for a Bank/UNDP energy assessment tentatively planned to commence in mid-1984, to assist the Government in developing an appropriate energy sector strategy. Petroleum Subsector 35. In the absence of domestic crude production, petroleum requirements have to be met entirely through imports, which reached 286,000 MT in 1982 (197,000 MT crude, 89,000 MT products). The 500,000 tpy (10,000 BD) oil refinery near Mogadishu, a simple topping plant, meets part of domestic product requirements and produces considerable fuel oil surpluses which are exported. The utilization of the refinery has never surpassed 60 percent of rated capacity, and operations were discontinued from late 1980 until March 1982 as crude supplies from Iraq were interrupted in the wake of the Gulf war. The refinery now runs mostly on crude supplied on a grant basis by Saudi Arabia. Additional volumes of gasoline, gas oil and jet fuel are imported for supplying primarily the extreme northern and southern regions of the country. 36. It is estimated that over the 1970-81 period, consumption of petroleum products grew by an av;erage of 14 percent per annum. However, in 1982 growrh slowed down ra about 6 percent, due to significant increases in petroleum produict prices. Domestic consumption in 1982 has been calculated at about 210,000 MT, but this may be an underestimate. Gas oil is the most important product, accounting for 54 percent of consumption in that year, followed by gasoline (21 percent), kerosene, jet fuel and fuel oil (8 - 9 percent each) and LPG (less than 1 percent). The demand for LPG is low due to supply uncertainties and the lack of containers. The transport sector absorbs about 67 percent; electricity generation, 15 percent; industry and agriculture combined, 11 percent; and commercial and residential uses, 7 percent. Government and public enterprises account for the entire fuel consumption for power generation and the larger part of consumption in the transport and industrial sectors as well. Mogadishu and the surrounding regions absorb about two-thirds of all petroleum product consumption. The remainder is consumed mainly in Berbera and Kismayo, with only a fraction being supplied to the interior of the country. 37. Future Demand. Future petroleum product consumption will mainly be determined by GDP growth which is projected not to exceed 3 - 4 percent per annum, large investment projects in the major productive sectors that could lead to quantum jumps in energy requirements, suppressed demand, foreign exchange availability to finance petroleum imports, international and domestic fuel prices, and consumers' response to future price changes. Increases in petroleum product demand are projected to average 3.7 percent per annum during the whole 1983-92 period, assuming that natural gas from Afgoy would be available for the  - I1 - Mogadishu area by 1986. In the absence of this gas, the demand might grow at about 6 percent per annum. 38. Imports in 1982 of crude and petroleum products are estimated at US$83 million (US$70 million net of product re-exports, mainly fuel oil). Purchases of crude and also some products were financed in 1982 through a grant from Saudi Arabia which is estimated to have amounted to US$50 million in that year and which has been available to cover crude imports from that country also in 1983. In line with domestic demand, petroleum imports are expected to increase significantly over the next few years. Total net imports are expected to peak at 308,000 MT in 1986, and then fall below this level through 1992 due to the impact of the Afgoy natural gas, which would increase the exportable surplus of fuel oil. However, measured in constant 1982 dollars, the net petroleum imports would exceed US$100 million by 1986, and US$130 million by 1992, assuming a 3 percent annual growth in real prices (from the 1982 level) after 1986. 39. Exploration. The responsibility for petroleum exploration and production rests with the Department of Mines and Hydrocarbons (DMH) of the Ministry of Mineral and Water Resources. DMH is also responsible for mining and quarrying and has a professional staff of 10, only about half of which have some petroleum background. These have received training under Credit 1043-SO, including on-the-job training by the consultants employed under the project. The 1983 budget of the Ministry (inclusive of Credit 1043-SO) amounted to about So. Sh. 14.4 million (about US$820,000 equivalent), of which about So. Sh. 12.8 million (US$730,000) is for petroleum exploration. 40. Until 1981, the Government awarded concession agreements under an outdated legal and contractual framework. Accordingly, under Credit 1043-SO, IDA financed the preparation of a modern petroleum legislation in the form of a revised mining code, mining regulations and model contract. A modern petroleum accounting system has also been prepared. The new legislation provides for improved financial benefits to the country under a production-sharing type contract that includes incentives for the development of smaller fields together with an increase of the Government's share for productive fields. It also provides for competitive bidding on small blocks, specific work commitments and acreage relinquishment, and information requirements. The Government has been conducting its latest negotiations with oil companies on the basis of this new framework, which was promuLgated officially in January 1984. 41. Nearly 90 percent of the roughly 1 million km2 of land and marine area (to a water depth of 200 m) is underlain by sediments with some petroleum potential. Exploration in the country began in earnest in 1948, and 57 wells have been drilled, several with minor shows of oil and gas. Currently, five groups are active in Somalia, headed by Arco, Agip (taking over the Cities Service concession), Texaco, Shell and Quintana, respectiveLy, operating under the previous contract regime. The remaining prospective areas in the south and the north were opened for bids in early 1983 (see Map), based on a promotional report and a meeting with oil companies finaiced under Credit 1043-SO. As a result,  - 12 - three bids were received for 10 blocks, all in the south. This was a good result under current international petroleum industry economic conditions. Negotiations between the Government and the companies have been completed for nine blocks and the contracts were signed in early March. Afgoy Gas Development Program 42. Background. The Afgoy-Coriole area (see Map) was explored in the early sixties by Sinclair Oil as part of a large concession area, but the company did not find the overall results sufficiently promising to justify further efforts, and pulled out of Somalia in 1968. Among the wells drilled in this area, Coriole-l (1961) tested minor amounts of oil and gas, and Afgoy-l (1966), located some 30 km from Mogadishu, flowed fairly dry gas at a stabilized flow of 6.4 MMCFD under a surface pressure of 5,600 psi, although a later test showed less promising results. The gas discovery was deemed non-commercial for Sinclair, and the well was plugged and abandoned and the area relinquished. The oil companies which took acreage in Somalia in 1979-81 did not show interest in the Afgoy-Coriole area, chiefly because the area was considered gas prone. The Government and IDA agreed that the area had a higher potential for gas than for oil. 43. A seismic survey of the Afgoy-Coriole area was financed under Credit 1043-SO. This survey identified several interesting features and confirmed that the Afgoy-l well is located on the flank of a promising structure. A detailed seismic survey was then carried out over this structure, financed by a US$1 million advance under the Project Preparation Facility (PPF). In all, 810 line-km were shot under the two surveys, with results of good quality. On this basis, several alternatives were considered for the development of the Afgoy gas resources, including the possibility of promoting the whole Afgoy-Coriole block for a combined oil exploration/gas delineation package. However, in discussions with several major oil companies operating in Somalia it was found that, while the results of the seismic survey showed several interesting leads, the area wouLd not be so attractive under present market conditions as to interest any serious companies in the gas project. As a result, it was decided that the area around the Afgoy feature be separated from the Afgoy-Coriole block for development by the Somali Government, while the rest of the block will be promoted shortly to the internationaL oil industry for exploration, using the interesting results of the seismic survey as a promotional tool. 44. Recent Findings. The newly acquired seismic data as well as the data from the Afgoy-l well have been analyzed by the Government's technical consultants (Keplinger, McCord Lewis). Their interpretation indicates that the structure has a horizontal closure of about 10 km2 (3.8 sq mi) and a vertical closure of about 500 ft. It is an east-west elongated anticline about 5 km long and 2 km wide at the Tertiary/Cretaceous boundary (about 12,500 ft), and separated from nearby features by a clearly indicated fault. The structure is estimated to contain about 50 ft of producible sands within a 600 ft gross section with more than 200 BCF of recoverable gas. With proper  - 13 - stimulation techniques, the sands should be able to produce about 5 MMCFD per well. These conclusions have been verified by IDA staff and independent consultants employed by IDA. 45. The deveLopment of the Afgoy gas resources would be undertaken in two phases in order to minimize financial exposure. The first phase, to be financed under the proposed project, would be to delineate sufficient gas reserves through two step-out wells from the Afgoy-1 well, which would aLso be re-entered to provide a back-up producer well at low cost. The productive capacity and deliverability of these wells would be confirmed through production testing. The subsequent phase would then consist of the installation of surface facilities, a pipeline U to Mogadishu, and retrofitting investments to convert major potential customers to natural gas. 46. Somalia's gas reserves, within the range of present reserve estimates, would have no export potential in the foreseeable future in view of the very large investments involved in gas exports and the existence of several potential competing projects. However, especially in view of the short distance from Afgoy to Mogadishu, the gas is of great interest to Somalia itself, and there is a clearly identified minimum demand for power generation (thereby permitting reduced crude imports or releasing fuel oil from the local oil refinery for exports) that is sufficient to justify the development of the Afgoy gas field. In addition there is a potential demand for gas for local transport, household use, and for existing and new industrial plants. On the basis of the results of the delineation drilling, an evaluation of the economic uses of the gas would be undertaken under the proposed credit. This work, together with det led engineering where appropriate, would provide a firm deu2nd forecast as a/basis for the sizing of the subsequent gas pipeline; determi - need for suitable conversion investments; and prepare the subsequent gas development project. PART IV - THE PROJECT Introduction 47. The proposed project was identified during the visit of a Bank mission to Somalia in January 1983 and appraised in September 1983. Credit negotiations were held in Washington, D. C., on February 6-10, 1984. The Somali Delegation was headed by Col. Ahmed Mahmud Farah, Minister of MMW. A credit and project summary appears at the beginning of this report, a supplementary project data sheet is given in Annex III, and a more detailed technical description in Annex IV. No Staff Appraisal Report has been prepared. Project Rationale 48. The principal thrust of the Bank's strategy for Somalia is to support the Government's focus on rehabilitation and other projects, where possible in directly productive sectors, with a quick yield and relatively high return. The country's large external debt (para. 18)  - 14 - also caLls for emphasis on activities that will increase exports or reduce imports. The proposed project meets both these criteria. In addition, the project provides for a power planning and gas utilization study which will be an input for decisions concerning the timing and sequencing of investments aimed at exploiting the water and hydropower resources of the Juba Valley. Through its association with the project, IDA would help to ensure competent execution of the delineation drilling and the establishment of an appropriate local gas corporation once the gas resources are developed. Project Description 49. The project would include the following components: D (a) The drilling of two wells on the Afgoy gas structure, followed by the re-entry and completion as a back-up producer of the Afgoy-1 well, if necessary. With appropriate stimulation and maintenance, each new well would be likely to produce about 5 MMCFD for 13 years; Cb) Drilling management (60 man-months at US$20,000 per man-month) to prepare and manage the drilling operations as the owner's representative. The management team would be headed by an experienced exploration manager assisted by an experienced drilling engineer, and include two drilling superintendants (alternating during drilling), a materials man and an administrator/accountant; (c) Petroleum technical consultants (13 man-months at US$20,000 per man-month). A petroleum consulting firm z.vuld provide during the period of drilling a well-site geologist and a petroleum engineer for testing; (d) Technical consultants (17 man-months at US$13,000 per man-month) for the preparation and detailed engineering for the subsequent development project; (e) Power consultants (18 man-months at US$13,000 per man-month) to undertake a power planning and gas utilization study, for which the terms of reference and schedule were agreed during negotiations. The purpose of the study would be Ci) to provide a thorough analysis for the Government of the investment requirements and options in the power sector, taking into account the availability of the Afgoy gas; and (ii) to determine with more precision the demand and economic uses for natural gas, investment requirements and gas pricing policy. In view of the considerable overlap between the two tasks, they would be undertaken in a closely coordinated manner; The study is planned to start in earLy 1985;  - 15 - (f) Assistance to the Ministry of Mineral and Water Resources in the form of (i) equipment and further training of the Ministry's personnel (about 18 man-months of foreign study) (on-the-job training would also be provided by the Ministry's consultants financed under the project); and tii) the cost of the audit of the drilling operation by a qualified international auditing firm (6 man-months at US$13,000 per man-month); Project Cost 50. The estimated total project cost is US$24.5 million, including a foreign exchange component of US$23.5 million. The drilling rig costs have been calculated at the quoted cost and mobilization fee for the only rig now availabLe in SomaLia, while supplies and ancillary services have been based on current prices for deliveries from nearby countries, primarily in the Middle East. The cost of consultancy services has been calculated at rates from US$13,000 per man-month for power and engineering consultants and auditors to US$20,000 per man-month for drilling management consultants, based on the rates currentLy being charged in Somalia; for drilling management and petroLeum technical consultancy services, account has also been taken of the need to establish a functionaL operational base in Somalia (with office equipment, telex, etc.), and the high travel costs that will be incurred during project implementation especially by frequent changes in personnel on continuous duty during drilling operations. Physical contingencies of 20 percent have been included for all components, while price contingencies of 10 percent per annum have been included after 1984, except for drilling services, materials and management, which have been calculated at early 1984 prices that are likely to hold for the period of the drilling (up to early 1985). Financing Plan 51. The proposed IDA Credit (US$18.0 million equivalent, including a Project Preparation Facility advance of US$1 million - para. 58) together with an EIB loan of US$5.5 million equivalent would finance all foreign costs. The Government will finance the estimated US$1 million equivalent local cost component for storage of drilling supplies, counterpart staff, administration and right-of-way, including compensation to the local population for any damages from the project operations. All contracts for drilling and consultancy services would be in foreign exchange and would be financed by external resources in view of the Covernment's tight foreign exchange position. 52. The EIB loan will be on the following terms: (a) 15 years including five years of grace; (b) An interest rate of 1 percent per annum, to be increased to the EIB subsidized rate (maximum 8 percent per annum) from the time of commercial gas production; and  - 16- (c) Repayments will be waived by EIB, if after three years it becomes clear that there will be no commercial gas production. The participation of the EIB is expected mainly to be in the form of parallel financing. An understanding concerning co-financing arrangements has been worked out between EIB and IDA, with tentative lists of contracts suitable for EIB financing and IDA financing. IDA is expected to finance primarily the drilling services and drilling management contracts. Final lists of contracts will be established before procurement is initiated. All contracts financqd by IDA or jointly by IDA and EIB will be procured on a basis acceptable to IDA (Draft DeveLopment Credit Agreement, Section 2.03, and Schedule 3.) Contracts financed soley by EIB would be procured under its procedures. The Development Credit Agreement contains the cross- effectiveness and cross-default clauses normal for this type of cofinancing (Draft Development Credit Agreement, Section 6.01(a) and 5.01(a). Project Implementation 53. The project will be implemented by the Ministry of Mineral and Water Resources, which has established a properly staffed project unit to be responsible for the project. The Government would undertake to maintain the unit in a form satisfactory to IDA for the duration of the project (Draft Development rredit Agreement, Section 3.02). This unit is based in the Ministry's Department of Mines and Hydrocarbons, is headed by a geophysicist, and includes a geologist, an-administrative officer, an accountant and support staff. In addition, the Government's technical consultants are providing under Credit 1043-SO a resident explorationist and specialists as required during the life of the project. During drilling operations, a well-site geologist would be based in Somalia, while a petroleum engineer would be present during testing. 54. The delineation drilling would be managed by a qualified drilling management company, headed by an experienced drilling engineer that would prepare a detailed drilling program and bidding documents, assist the project unit in contract negotiations, and as owner's representative, control the drilling operations and well completions, as per standard industry practice. The company would report to the project unit within the Ministry on a reguLar basis, and on a daily basis during drilling, it would have full authority on its own for the operational decisions during drilling. The drilling itself will be undertaken by a qualified drilling company, which would be responsible for the supply of most materials. 55. Contracts for the various services will be prepared by the drilling management company for the approval of the project unit. The draft drilling program has been provided to IDA, and is being discussed. The agreed drilling program could only be changed with IDA's approval (Draft Development Credit Agreement, Section 3.05(b)). The signing of a satisfactory contract for drilling management was a condition of credit effectiveness (Draft Development Credit Agreement,  - 17 - Section 6.01(b)). However, this contract has already been signed. 56. Local CapabiLities. In view of the discrete, one-time nature of the drilling operations, which will be under the responsibility of qualified drilling management, no significant training uf local personnel has been included for this activity, except for on-the-job training during all phases of operations. The staff assigned by the Ministry for the project unit is qualified to undertake the general management of the operation, assisted by its technical consultants, and most of the accounting will be handled by the drilling management. However, greater local expertise will be required to manage the * subsequent gas facilities (completed well, surface facilities and pipeline). 57. Under the credit, the Government would agree to establish not later than March 31, 1985 an autonomous gas corporation to be responsible for the subsequent gas development and operation of the gas facilities (Draft Development Credit Agreement, Section 3.06). During negotiations, an understanding was reached on a program for the establishment of this corporation. It is expected that the project unit would become the core of this corporation, to be established once the Afgoy reserves have been proven. Only a limited number of staff (about 15 in all) would be required to operate the gas faciiities, with the assistance of a qualified foreign firm. This staff would be recruited and trained (inclusive of on-the-job training) during pipeline construction and early operations, or in the period 1985-86. Accordingly, while some training of gas corporation personnel would be financed under the present credit, this would mostly be handled through the subsequent development phase. 58. A US$1 million advance from the Project Preparation Facility was approved by IDA on February 9, 1983 to finance the seismic survey (completed in June 1983) and technical study (completed in February 1984). This advance would be refunded out of the proposed credit. 59. Compensation for Land Acquisition and Land Use. In view of the relatively sparse settlement in the operational area, damages to the local population's land and crops are expected to be relatively minor. The need for acquiring land for the drilling and production facilities will be small and have minimum impact on agricultural output. The Government would ensure prompt and adequate compensation for any damages or land acquisition (Draft Development Credit Agreement, Section 3.08). The project unit would be responsible for this matter. In this regard, the unit would first survey the area to estimate the potential for possible damages and then liaise with the Local population and record any claims and include data on claims and compensations in the project account. The Ministry disposes over a special account that would, if necessary, be used to pay compensation. This arrangement was confirmed during negotiations. Procurement and Disbursement 60. To ensure appropriate flexibility, the drilling contracts would be made with the option for the Government to modify the drilling  - 18 - program after the compLetion of each well. For drilling, there is only one rig available in Somalia. This rig wilL be available in mid-July, 1984, with onLy a few possible jobs on the horizon. rn view of the present Low demand elsewhere for drilling rigs, it is therefore being offered on advantageous terms, with a competitive daiLy rate and no mobilization costs. No comparable rigs from outside Somalia could possibly be offered on such terms. Accordingly, the Government would procure the services of this rig through a directly neogotiated contract. Contracts for the various ancillary services would be made on the basis of the lowest evaluated bid from a shortlist of qualified companies for each service per sound industry practice, and for drilling supplies on the same basis from qualified supply firms. The Government would keep Keplinger, McCord Lewis, as technical consuLtants in X continuation of the ongoing contract for which the firm was selected in accordance with IDA's rules. The drilling management firm and all other consultants would be selected in accordance with IDA's guidelines. 61. IDA disbursements would be made against 100 percent of foreign expenditures. For the few instances where joint financing of contracts may occur, arrangements have been worked out with EIB according to which IDA and EIB would effect disbursements sequentially against separate invoices within pre-agreed respective limits. Both institutions would keep each other closely informed of any disbursement request as well as of any disbursement made under said contracts. Because of the nature of the project, most of the proceeds of the credit are expected to be disbursed in the first year after effectiveness, and the credit is expected to be fully disbursed about three years after effectiveness. 62. Advance Contracting and Retroactive Financing. The mobilization of some drilling supplies can take considerable time. In order to permit early and efficient drilling operations, it may therefore be necessary to commence procurement prior to credit signing. To provide the necessary flexibility for the Government in these matters, IDA and EIB would permit advance contracting for technical consultants, drilling management, drilling contractor (incLuding supplies) and technical consultants, and retroactive financing under the credit would be permitted of upto US$1.0 million (6 percent of the credit amount) for expenditures incurred between appraisal (September 5, 1983) and credit signing (Draft Development Credit Agreement, Schedule 1, para. 3(b)). Accounting, Auditing and Reporting 63. The Ministry of Mineral and Water Resources would keep separate project accounts, which would be audited by external auditors acceptable to the Ministry and the Association, and the audit reports would be submitted not later than six months after the close of the fiscal year (Draft Development Credit Agreement, Section 4.01(b)). For the complex drilling operation, also involving substantial cofinancing, the participation in the audit (for the years 1984 and 1985) by a qualified international auditing firm would be required. The Ministry would also submit a project completion report not later than six months after the closing date (Draft Development Credit Agreement, Section 3.07(c)).  - 19 - Benefits 64. The benefits of the projects under the gas deveLopment program would be the following: (a) Development of a domestic energy source close to Mogadishu, which would replace imported fuel and save scarce foreign exchange resources. Potential foreign exchange savings/earnings (from fuel oil exports) by the early nineties could reach about p US$22 million per annum at 1982 international prices; and (b) The Covernment's petroleum administration is still weak and dependent on outside technical assistance. An important objective of the projects would therefore be to ensure that the drilling and field development is executed in a competent manner, and to develop an appropriate local gas project authority that subsequently would be able to operate the gas facilities on its own. This authority would be established formaLly during the period of the present project, but most training and technical assistance (including an initial management-type contract with an experienced pipeline company) would be provided under the subsequent gas development; 65. Rate of Return. The ex-post rate of return of the Afgoy gas development would depend on the size and deliverability of reserves, the existence of alternative sources of fuel, and on the economic value of the gas in various uses and the consumption profile. Furthermore, the value of gas cannot be determined simply by reference to the value of displaced fuels, but must be assessed in terms of changes in total system costs. No such complete evaluation can reasonably be undertaken at this stage. However, an initial study financed by IDA estimated the economic value of gas for power generation at between US$2.60 and US$4.20 per MCF, depending on the assumptions used, while the cost of the gas under minimum demand assumptions would be Uf 1.95 per MCF, at 10 percent rate of discount, giving a netback value- of between US$0.65 and US$2.25 per MCF. A minimum economic rate of return of the gas 1/ The netback represents the gas price that wuuld cause the project just to break even and is defined as the present value of the net benefits of the project, excluding the cost of gas used, divided by the present value of gas consumed on the project.  - 20 - program has been calculated1tt 17 percent, but this could well turn out to be substantially higher.- A 10 percent increase in investment costs would reduce the rate of return to 15.3 percent, and a 10 percent reduction in unit economic benefits would reduce the rate of return to 15 percent. Risks 66. The justification for the proposed project is based on a qualitative as.sssment of the geological, technical and economic risks, which are present in all drilling projects. The geological risk is that insufficient reserves of gas would be found. This risk is low in view of the fact that the drilling would be done on a confirmed structure where the existence of gas hag already been proven. The wells will be located carefuLly based on a detailed examination of the seismic data. The detailed seismic survey has not indicated any faults that could create problems in this regard. 67. The technical risk is that the project may not be compLeted efficiently due to difficulties or serious cost overruns in drilling and testing the wells. This risk is not high since the available geological information does not indicate any difficult pressure zones or other abnormalities. Also, experienced contractors would operate the rig and provide ancillary services, and the drilling operations would be managed by a qualified and experienced drilling management company. There is aLso a risk that locaL conditions including administration couLd cause delays leading to cost overruns. This risk would be reduced (a) by the existence of continuous Government administration in the project unit, (b) by using a qualified drilling management, and tc) by requiring that drilling operations would only commence once all materials are available on site. A serious cost overrun due to significant price increases is considered unlikely under present market conditions, which are projected to change only slowly. 68. The economic risk is that the delineated gas reserves would be too smalL or too costly to develop. This risk is also low in view of the fact that the existence of gas has already been proven and that the 1/ This rate of return has been calculated on the following assumptions: (a) only the minimum demand for electric power has been included, for the period 1986-2003; (b) economic benefits have been taken as the equivalent export price for fuel oil (US$2.80 per MCF equivalent; this figure is derived from a market price CIF Mediterranean of US$170 per ton and a 20 percent discount for the transport of small lots from Somalia;) (c) investment costs in para. 50 have been used, with the cost of the subsequent Afgoy gas development (including retrofitting investments for power) estimated at US$13 million and operating costs at US$600,000 per year; and (d) the drilling of a third new well has been assumed for 1991 to accommodate the growth ir demand.  - 21 - overall development program could show a 10 percent rate of return with as little as about 40 5CF, against present reserve estimates of more than 200 BCF. The development costs would increase if the existence of very tight sands should cause low deliverability and thus require a larger number of wells. However, in view of the test results of the Afgoy-l well (6.4 MMCFD), it in likely that with appropriate stimulation, the new wells could produce at leart 5 IMCFD, which would be sufficient for a return of 15 percent. PART V - LtCAL INSTRUNITS AND AUTHORITY 69. The Draft Development Credit Agreement between the Somali Democratic Republic and the Association and the Recommendations of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association are being distributed to the Executive Directors separately. 70. The Draft Development Credit Agreement conforms to the usual pattern of agreements on drilling projects. Special conditions of the project are listed in Section 3 to Annex III to this report. 71. 1 am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RCOMMMDATION 72. I recommend that the Executive Directors approve the proposed credit. A. W. Clausen President Attachments Washington, D. C. April 10, 1984  - Zz - Annex I T A S L E 3A PAIE I SOMLIA - SOCAL LOICATOURS DATA SHEEr SUHALIA MEFEAz GRoUPS (IEiGILI AvERAGEs) / NOSF (Chr RECENT TIfIa) lb 196ioaL 197001 ESTIMATSZZ- AFKLCA S. OF 5hURAL AFRICA S. Or SAARA &IRK CtsMMo SQ I) TOTAL 637.7 637.7 637.7 AGRICULTURAL 298.2 298.7 299.2 cw u CAPITA Cus$) 110.0 120.0 280.0 254.6 L147.9 END! CONUMPTION PER CAPIT C1L sGRAHS Of COAL FlJtGVALI) 16.0 35.0 85.0 7,.. 724.2 POIUA?M -D YITL S=l=IC5 POPULATIOS.Nf-TYEAR (THOUSANDS) 2450.0 3238.0 4392.0 URBAS POPULAnTIN (L UF TUrAL) 17.3 23.1 30.9 N9.5 26.5 POPULAnICO PtUJECrECS POPULATIOS N TEM 2000 ClL) 7.0 SrATI.i1X1 POPULATIOt (CILL) 23.3 YTUA SrTrbAOSARY MP. EAOED 2155 POPULATIO DENSITY PER SQ. la. 3.18 5.1 6.7 29.5 56.5 PER SQ. 1I ACrI. LAND 8.2 10.8 14.3 94.1 U31.8 POPUrIrS AGF STRUCTURE CZ) 0-14 YRS 43.8 46.5 43.5 45.0 45.9 15- YRS 53.6 5l.b 53.8 52.1 51.2 65 A31D AVE 2.7 1.9 2.7 2.9 2.8 POPULATION CGR0W PATE (;) TOTAL 1.8 2.6 2.8 2.8 2.8 UlBmN 4.8 5.7 5.4 6.2 5.3 CRUDE BIKET RATE (PER THtUS) 48.2 48.2 48.3 47.9 47.6 CWDE DEAMI ElAE (PEM TUOUS) 28.Y 26.8 25.3 19.2 IS.2 CROSS REPRO 01; RUIE 3.2 3.2 3.2 3.2 3.2 FAMLY PLAZa; ACCEPORS. ANNLL (TdOUS) .. USERS (- O HARRIED hUME) .. .. FOOD AVD ZZITIOU EXDEl OF FOOD PRlOD. Eu CAPI 196971-100) 97.0 100.0 62O 87.8 95.7 PSR CAPITA SUPPLY OF CUARIEF (2 OF REQUIREMENTS) 89.0 82.0 100.0 88.0 97.1 PROTEINS (GRAMS PER DAY) 76.0 68.0 78.0 51.2 56.0 OF WHICH A.LUL AMD PULSE 47.0 43.0 35.0/c I8.1 17.2 CHIUD (ACES 1-4) DEATM RATE 39.9 35.1 31.2 25.7 23.6 LIFE EPECr. AT 3LRIU (YEARS) 35.0 37.2 -'.8 47.4 S1.9 INAN MORT. RArE (L THOUS) 175.0 158.5 14S.1 126.5 117.6 ACCESS TO SAFE hATE (ZPOP) TOL 15.0 33.0/d 24.7 25.4 URBAN .. 17.0 51.07 56.a 7D.5 RURAL 14.0 20.07; 18.3 12.3 ACCESS TO EXCRErA DISPOSAL (X OF POPUATION) TOTAL -- 47.01 2.1 URsAN .. .. 77.d7 65.7 AURAL .. .. 35.07 21.9L POPULATION PER PYSICUIA 36570.0 24530.0 14290.0 Z7420.6 L2181.6 PDP. ER RIRSIME PERSON 410.0 4280.0 2330.0 3456.2 2292.0 POP. PER HSPITAL BED TOTAL 690.0 660.0 660.0/c 1183.2 1075.4 URBx 140.0 280.0 .. 3E0.6 402.3 RUMAL 5640.0 7390.0 .. 3177.5 3926.7 AURUSSLONS PER HOSPITAL DED .. .. AVERACE SIZE OF WUDSEHOLD TOTAL -- ' URBAN '' ' RURAL .. .. 5.5t. AVERAIE NO. OF PERSONSIROOH TOTAL .. .. URBAN .. .. RURAL .. ACCESS TO ELEcr. (2 OF EWLLNS) TOTAL .. .. URBN .. ... RUItAL .. ..  - 23- Annex I r A r A L E :a rAE z SOALIA - SOCIAL INDICATORS DATA SlEET SRnALL sEvuIwa CROOn (WEIGHE AVENUES) in MOST (MOS R ECENT SlTrAZC) /b RECENT lb LOW DICCDI MIDLCiIcomE 9gtlt! 1971-b ESTIMATE- AFRICi S. OF SAHARA AFRICA S. OF SAHARA ADJUStEO EMOLLUIZIT rTIOS FKLW&RY: TOTAL 9.0 L1.0 41.0 63.9 97.2 HALE 13.0 17.0 53.0 73.b 103.1 FEMALE 5.0 S .0 29.0 51.6 88.5 SeWOUAnY: TTAl. 1.0 5.U b.U 12.5 17.Z SAL Z.0 8.0 9.0 16.7 Z3.5 FEMAlE 0.2 2.0 3.U 8.1 16.Z vocArIONAL (C OF SEWUUAY) 26.4 3.1 Z:.9 7.3 5.2 PUPIL-,TACWn RATIO ryISly 29.0 33.0 31.U 44.4 42.9 stC%DAY 2U.0 26.0 16.U 25.1 23.7 ADULT LITfACT SATE (Z) 1.51j 5.0 60e07ft 36.5 37.1 CcNSmIrrtoM FA5SE E CQAS/TdaUUSaNO POr 1.L 2.1 .. 3.3 18.8 RADIO IECEEVENS/TMusII POr 9.8 L5.4 20.4 45.3 97.8 TV ReCEIVERSITNOUSASD POP .. .. .. 2.2 16.6 NLVS1APE* (-flALLf ccsM. It;MlST-) CLtuLATIOS PER TdOUSAND POPULATID 0.8 1.4 ,, 4.7 18.Z dEVIL AZIUAI. ATI13DaSCEICITA 0.6 1.5 ,, 1.0 0.6 TOTAL LAOR FORCE (WOOS) 1017.0 1257.0 1717.0 FRLALE (PERCEST) 30.1 29.7 27.5 34.5 36.1 AGA2CULTURE (PEcENT) 88.0 85.0 82.0 76.9 56.8 INmUsr (PESCET) 4.0 6.0 8.0 9.8 17.5 VARTlCIPATION RATE (PERCENT) TOTAL 4L.5 38.8 39.1 40.9 37.0 KALi; 56.7 55.2 56.2 53.0 47.1 FLMALE 24.7 2z.6 21.7 28.S 27.0 EcOOMC OEPENCY RATIO 1.1 I.Z 1.2 1.2 1.3 INCM DVMtIBSUII PERcENT OF PtIVATE IN;CdE IlGHES ,5Z OF WOSEdOLDS .. .. dIC*MST 201 OF HOOSEdOLDS .. .. ULMEST 201 OF lOUSeIUOLOS .. .. LOUES? 401 OF UgtOStDLOS ._ ._ iouwon %Mt=G ESTLIATEO aISOLOTME POVERT iCu LEVEL tUSS PER CAPITA) URBAN ,, ,, 150.0tE 165.9 534.2 RURAL .. .. 11o.0r 87.4 Z55.9 ESTIMATED RELATIVE poE=TY INCOME LEVEL tUSS PER CAPITA) gaBi3 .. .. 65.0/f 100.8 491.5 RURAL __ . 50.Olr 64.6 188.1 ESTIMTED POP. 8ELj. IJSOLUtE POVERtY INCOME LFVEL (2) URBNM .. . 40.0/f 39.5 RURA. L. .. 70.@0f 69.0 nor AVAILAULE NOr APPLLCABLE N u T E S /a The sroup arages for eacb indicator are popa:ionve4Ited arithmetic _ans. Coerage of cou