India - Cambay Basin Petroleum Project

Document of The World Bank FOR OFFICIAL USE ONLY F t 17 v1o 1 A,4.,/. Report No. P-3751-IN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$242.5 MILLION TO INDIA FOR THE CAMBAY BASIN PETROLEUM PROJECT March 9, 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 (As of March 7, 1984) US$1.00 = Rs 10.689726 Rs 1.00 = US$0.093548 Rs 1 million = US$93,548 The US Dollar/Rupee exchange rate is subject to change. Conversions in the Staff Appraiisal Report were, except as otherwise noted, made at the rate of US$1 to Rs 10.0 which represents the projected exchange rate over the disbursement period. FISCAL YEAR April 1 - Marcb 31 ABBREVIATIONS AND ACRONYMS USED IN THIS REPORT API - American Petroleum Institute BOP - Bombay Offshore Project GOI - Government of India km - kilometer LPG - Liquified Petroleum Gas Mmcmd - Millions of cubic meters per day NGL - Natural Gas Liquids (or condensate) OIL - Oil India (Limited) ONGC - Oil and Natural Gas Commission OPEC - Organization of Petroleum Exporting Countries toe - Tons of oil equivalent ERR - Economic Rate of Return EOR - Enhanced Oil Recovery OIDB - Oil Industry Development Bank Bbl - Barrel (equivalent to 42 US gallons) IOIP - Initial Oil in Place SCF - Standard Cubic Feet  FOR OFFICIAL USE ONLY INDIA CAMBAY BASIN PETROLEUM PROJECT LOAN AND PROJECT SUMMARY Borrower: India, acting by its President. Beneficiary: Oil and Natural Gas Commission (ONGC) Amount: US$242.5 million, including the capitalized front-end fee of 0.25%. Terms: Repayment over 20 years, including five years grace at the standard variable interest rate. On-lending Terms: Government of India (GOI) to ONGC (US$242.5 million). Funds will be onlent to ONGC at a rate of 12% per annum; repayment over a naximum of 15 years, including five years' grace. GOI would bear the foreign exchange and interest rate risks. Project Description: The purpose of the project would be to assist the Oil and Natural Gas Commission (ONGC) in developing its capabilities for optimizing the production of existing, mature oil f-ields--a new area of tech- nology for India's fledgling oil industry. The project comprises the preparation and implementa- tion of a US$954 million investment program for increasing the production of oil and gas from the onshore Cambay Petroleum Basin located in the State of Gujarat in western India. Specifically, assistance would be provided in (i) exploration - to delineate, by seismic survey and drilling, the limits of the known producing zones; (ii) development and production - to sub- stantially increase the production of both oil and gas; (iii) enhanced oil recovery - to test alter- native technologies for increasing recoverable reserves; and (iv) technical assistance and train- ing to ensure that ONGC staff acquire the requi- site skills to successfully implement the new methodologies. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Thle principal project risks are those normally associated with petroleum exploration and development, i.e., geological and technological. The geological risks include the possibility that oil will not be found in commercial quantities in the deeper zones to be explored. The technology being introduced under the project is a blend of proven, profitable and "leading edge" technology in such proportions, and with adequate foreign technical assistance and training, that the risks - both economic and environmental - are acceptable under all reasonably expected adverse scenarios.  - iii~ - Estimated Costs: (US$ millions) Local 1/ Foreign Total Exploration 19.3 61.7 81.0 Development and Production 269.6 319.2 588.8 Enhanced Oil Recovery 2.6 5.0 7.6 Technical Assistance and Training 2.0 5.0 7.0 Project Base Cost 293.5 390.9 684.4 Physical contingencies 39.7 58.4 98.1 Price contingencies 75.3 95.9 171.2 Total Project Cost 408.5 545.2 953.7 Front-End Fee on IBRD loan --- 0.6 0.6 Total Financing Required 408.5 545.8 954.3 (US$ millions) Financing Plan: Local Foreign Total IBRD 242.5 242.5 Cofinancing / -- 245.0 245.0 ONGC 408.5 58.3 466.8 Total 408.5 545.8 954.3 Estimated Disbursements: (US$ millions) Bank FY FY84 FY85 FY86 FY87 FY88 FY89 FY90 Annual 0.6 3/ 35.8 60.6 72.8 36.3 24.3 12.1 Cumulative 0.6 36.4 97.0 169.8 206.1 230.4 242.5 Economic Rate of Return: About 91% for total project. Financial Rate of Return: About 18% after taxes. Appraisal Report: No. 4928-IN, dated March 8, 1984. 1/ Includes an estimated US$150.0 million in duties and taxes. 2/ Including Euro-currency borrowings and suppliers' credits. 3/ Front-end fee.  I I I  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN FOR THE CAMBAY BASIN PETROLEUM PROJECT 1. I submit the following report and recommendation on a proposed loan for US$242.5 million (equivalent) on standard terms to help finance the improved recovery and production rates of the already producing oil fields in the Cambay Basin in the State of Gujarat in India. PART I - THE ECONOMY 1/ * Background 2. An economic report, "Economic Situation of India and Resource Mobilization Issues" (4395-IN, dated April 11, 1983), was distributed to the Executive Directors on April 19, 1983. Country data sheets are attached as Annex I. 3. India is a large and diverse country with a population of about 700 mil- lion (in mid-1982) and an annual per capita income of US$250. The economy is dominated by agriculture which employs more than two-thirds of the labor force. However, the land base is not sufficient to provide an adequate livelihood to everyone engaged in agricultural activities, especially those with little or no land. Growth of value-added in agriculture -- 2.2% since 1950/51 -- has been slower than growth of industrial value-added (5.0% per annum). As a result, there has been a gradual decline in the share of agriculture in GDP (at factor cost) from 60% to just under 40%, while the share of industry rose from 15% to around 25%. But industrialization has not been rapid enough to absorb the growing labor force, or to bring about a rapid economic transformation, with significantly higher productivity and income levels. As a result economic growth has been slow over the past three decades, averaging about 3.6% per annum since 1950/51. 4. Nevertheless, there has been steady progress with per capita income rising by about 1.4% per year in the period 1950 to 1980. Despite the large population base and its relatively rapid growth, India has been able to eliminate persistent dependence on foodgrain imports through significant improvements in agricultural production. Savings and investment have increased 1/ Parts I and II of the report are substantially the same as Parts I and II of the President's Report for the Tamil Nadu Water Supply and Sanitation Project (No.P-3741-IN), dated March 1, 1984.  -2- markedly since 1950/51: gross national savings more than doubled from 10.8% of GDP (at factor cost) to 22.8% in 19821J83, while gross domestic investment rose from 12.5% of GDP to 24.9% in 1982/83., Foreign savings (balance of payments deficit on current account) have never financed a major portion of domestic investment: a peak of about 20% was reached d-uring the early 1960s. Surpluses arose for a few years in the late 1970s5 and at the present time, foreign savings are about 8% of investment. External assistance has been low both as a percentage of GDP and in per capita terms, never rising above 3% of GDP and averaging below 1% for the past five years. Net foreign savings have never risen above 3% of GDP, and presently stands at 2.1%. 5. Before the 1970s, India placed relatively less emphasis on export promotion and more on import substitution. The volume growth of exports between 1950/51 and 1969/70 averaged only 2.2% per annum, while the volume growth of imports over the same period was 4.3%. In the early to mid-1970s, however, India's terms of trade, which had remained roughly constant during the 1960s, deteriorated sharply. In response. tIhe Government introduced various policy measures designed to stimulate exportsc As a result, the volume of India's exports grew on average about 7.3% per a-nnfum for the 1970s as a whole, a performance which demonstrates that sustained rapid growth is possible. While expanding world markets, particularlSy in the nearby Middle East, con- tributed to this growth, liberalized access to imported inputs and more effec- tive export incentives played a major role. 6. Moving into the second half of the 1970s, the Indian economy was buoyed by higher levels of investment and an expanding level of foodgrain output. As a result, growth in real GDP and in agricultural and industrial value-added, substantially exceeded the historical 30-year trends (paragraph 3) averaging 4.9%, 3.9% and 5.6%, respectively. In 1979/80, however, this momentum was broken when the worst drought in recent vears, co.mbined with a doubling of international oil prices and domestic supply shiortages, led to a sharp fall in foodgrain production, a declinie "n GDP, and the opening up of a large trade deficit. Severe inflationary pressures also emerged after several years of virtual price stability. These setbacks in 1979/80 coincided with the prepara- tion of the Sixth Five-Year Plan which laid down a program of adjustment that aimed at improving the trade deficit, removing infrastructural bottlenecks and ensuring price stability with an overall growth of the economy of 5.2%, 1.6 per- centage points above the trend growth of 3.6%. Recent Trends 7. In 1980/81 and 1981/82, the economy substant-ally recovered with real GDP growing by 7.9% and 5.2%, respectively. While industrial output expanded by 4% in 1980/81 and 8.6% in 1981/82, recovery was particularly robust in agriculture where normal weather helped output to rise by more than 15% and 5.5%, respectively. The availability of power, coal, and rail transport, already improved in 1980/81, was even better in 1981182, recording growth rates of about: 10%, 9.6% and 12.9%, respectively. The easing of constraints on the supply of infrastructure and basic commodities was a determining factor in the improvecl performance of the industrial secto7r This overall improvement in the Indian economy, combined with a more restrictive monetary policy contributed to a sharp decline in the rate of inflation. Wholesale prices rose by about 9% on an average annual basis in 1981/82 and bv only 2.5, in 1982/83, reflecting a strong deceleration from a peak increase of 18% in 1980/81.  -3- 8. After two years of fairly solid performance, the Indian economy faced a difficult year in 1982/83 due to the drought in mid-1982 which brought down the GDP growth rate to around 2% and put further strains on the already dif- ficult balance of payments and domestic resource situation. Besides a sig- nificant decline in the range of 4.5%-6.5% in agricultural production, GDP growth was also constrained by a slowdown in industrial growth from 8.6% in 1981/82 to about 4% in 1982/83. This resulted from a combination of several factors, notably the decline in agriculture income, persistent (though lessened) power shortages, a textile strike in Bombay, as well as depressed export markets and increased competition from imports. The Government was able, however, to protect the level of savings to a large extent and keep the momentum of the investment program through largely successful public sector resource mobilization efforts. Foreign savings played a crucial role in sup- port of this effort. Similarly, t'he timely implementation of various economic policies mitigated the otherwise very distressing effects of a poor monsoon. Continued improvements of the infrastructure sectors, although at a slower pace than in the previous two years, also reduced the negative effects of the drought. 9. Agricultural production in 1982/83 received a serious setback from the drought. Foodgrain production, which had reached a record 133 million tons in 1981/82, declined to 124-127 million tons. Production of most other major crops also declined in 1982/83. Corrected for weather variations, this still represents a creditable performance. In 1979/80, with a broadly comparable monsoon, foodgrain production reached only 109 million tons. The Government was able to mitigate the effects of the 1982 drought through efficient manage- ment of foodgrain procurement and distribution, careful timing of foodgrain imports, and appropriate allocation of power to irrigation pumps. These policies helped to avoid disruptions in basic food supplies and contributed to price stability during the year. While the management of the foodgrain economy after the drought was a significant achievement, the effect of the drought on production re-emphasized the continued importance of the monsoon in India's agriculture. The performance of the recent past and probable future trends suggest that on average foodgrain supplies will meet demand. The balance remains delicate, and the need for foodgrain imports to maintain con- sumer supplies or adequate buffer stocks could arise from time to time. Thus, programs to expand irrigation, strengthen extension and encourage the efficient use of other agricultural inputs continue to receive high priority. 10. Basic infrastructure services performed generally well in 1982/83, although growth of coal, power and rail transport failed to maintain the momen- tum of the marked recovery of 1981/82. Despite lower hydro generation due to the failure of the monsoon, overall power generation recorded an increase of about 7%. This was due largely to an increase in capacity utilization in thermal plants resulting from improved overall management, stabilization of most of the new large units and better availability of coal due to the combina- tion of increased coal production and improved railway performance. Nevertheless, power shortages remain the major bottleneck in the economy. Railway traffic grew by only 3.7% in 1982/83 reflecting a slowdown from 1981/82. The lower growth was due not to a decline in the operational efficiency of the railways but rather to slack demand from core sectors like steel, iron ore, coal washeries and fertilizers. Coal production growth (4% in 1982/83), after 10% growth in the two preceding years was creditable. There were no major shortages and there were improvements in the quality of coal. Recent easing of shortages and bottlenecks in infrastructure has come primarily from better utilization of existing capacity, but in the future most improve- ment must result from added capacity. It is therefore critically important  -4- that India maintain the pace of investment in these key sectors and mobilize sufficient resources to do so. 11. The Indian economy has reverted from a situation of resource surplus, which had been a temporary phenomenon of the Late 1970s, to one of resource scarcity. Investment has again grown quicker than national savings, and the scope for further increases in the latter appears limited. India's gross national savings rate, which averaged 22.4% of GDP in the last three years, is high by any standard, particularly considering India's low income and the large proportion of its population living below the poverty line. Future increases in savings will depend heavily upon the enhanced profitability of public sector enterprises which would reqcuire better utilization of capacity, more efficient operations and adequate pricing policies. In 1981/82 there was a significant increase in public savings clue to improved profitability of various public sector enterprises. This trend which was maintained in 1982/83 needs to be accelerated. The gap between gross investment: and national savings which rose from 0.4% of GDP in 1979/80 to 1.8%, 2.3% and 2.1%, respectively in the first three years of the 1980s, has been financed by foreign savings. 12. India's ability to generate resources to meet its development objec- tives has become increasingly linked to the balance of payments. The current account balance which recorded surpluses between 1976/77 and 1978/79, sharply deteriorated to deficits of nearly US$2.9 bil:Lion in 1980/81 and US$3.8 billion in 1981/82 (1.8% and 2.3% of- GDP, respectively). This was partly due to a sharp rise in the oil import: bill as a result of both the disruption of oil production in northeast India in 1980 and significant oil price increases, and to a more liberal import policy aimed at prov:iding producers with access to inputs for higher capacity utilization, greater efficiency, improved technology and capacity expansion. The current account deficit in 1982/83 declined to US$3.3 billion or 2.1% of GDP. The improvement would have been greater had not th,e drought resulted in the need to rebuild food stocks through imports and at thie same time led to a lower level of GDP growth. This improvement in the balance of payments is to a significant degree the result of India's develop- ment and adjustment efforts over the past three years. It also reflects a re,duction in the trade deficit as compared to the levels reached in 1980/81 and 1981/82. The trade deficit declined from US$7.6 billion in 1980/81 to US$6.0 billion in 1982/83 due to continued export volume growth (following the sub- stantial resumption in 1981/82) despite poor world market conditions, coupled with the containment in import growth due to import substitution of petroleum products, metals and fertilizers while allowing substantial growth in "other" imports through more liberal import policies. Nevertheless, it is expected that the balance of payments will be under strain for the next several years, for India's adjustment program will continue to require high levels of imports. 13. The high investment rate, about 25% of GDP, envisaged in the Sixth Plan coupled with the limited possibilities of raising domestic savings beyond the present high levels, necessarily implies a need for external resources. Faced with a reduction in the availability of bilateral and multilateral concessional assistance, India has begun to borrow significant amounts on commercial terms from the Euro-dollar market in addition to much greater utilization of suppliers' and export credits. India's favorable debt service profile has enabled India to tap commercial capital markets at favorable spreads (over reLatively high underlying rates). In the period 1980-82 India contracted commercial loans totalling cver US$2,000 million and suppliers' credits of about US$520 million. The bulk of the loans are linked to specific development  -5- projects in the public sector while the credits are linked, by and large, to development projects in the private sector. India also reached an agreement with the International Monetary Fund for the use of the Extended Fund Facility for SDR 5 billion, of which SDR 2.5 billion have already been drawn. The transfer of funds under the EFF has stemmed the use of foreign exchange reser- ves which had fallen to less than four months of import coverage in 1981/82. In 1982/83, in addition to continued use of the EFF, financing requirements were met by increased non-concessional borrowing (about US$2,000 million in new committments) and a 10% increase in net aid disbursement. Development Prospects 14. The experience of recent years illustrates that India has the capacity to grow and develop at a more rapid pace. Although the industrial sector is small compared to the size of the economy, it nevertheless is large in absolute terms and has a highly diversified structure-, capable of manufacturing a wide variety of consumer and capital goods. Basic infrastructure -- irrigation, railways, telecommunications, power, roads and ports -- is extensive compared to many countries, although there is considerable need for additional capacity as well as improvement in the utilization of existing capacity. India is also well-endowed with human resources and with institutional infrastructure for development. Finally, India has an extensive natural resource base in terms of land, water, and minerals (primarily coal and ferrous ores, but also gas and oil). With good economic policies and reasonable access to foreign savings, India has the capability for managing these considerable resources to accelerate its long-term growth. 15. The medium-term framework for advancing India's development objectives is the Sixth Five-Year Plan (1980/81-1984/85), which is now in its fourth year. The Plan assigns priority to agriculture, energy development, the growth of exports and domestic import substitutes where appropriate, and the removal of infrastructural bottlenecks. Overall performance has so far been encouraging, although bottlenecks in key sectors such as power and transport are likely to persist. Moreover, fulfillment of the Plan targets will require additional resource mobilization. The efforts of the Central Government to raise resour- ces have so far been impressive and are likely to be broadly sufficient to meet the financing requirements of the Central Government's share in plan investment, even if some increase in inflation is experienced above current low levels. However, a shortfall in public savings is likely to occur in some States unless further measures are introduced. There will be a need also for continuous efforts to maintain the current level of private savings. Recent increases in interest rates and tax concessions on time deposits and the con- tinued dampening of inflationary expectations should stimulate such savings. 16. The higher capital formation rates of the past few years augur well for future income growth. However, returns to investment have so far been relatively low. Much of this phenomenon relates to India's stage of development, in which a large and growing proportion of investment has been needed to build up basic infrastructure. These services, such as power, tran- sport and irrigation, have inherently high capital-output ratios. However, there is scope to improve the sectoral capital-output ratios through greater efficiency and better management. Bottlenecks in basic infrastructural sectors clearly can prejudice growth in other sectors where large investments have been made. As demonstrated in the last three years, performance in the basic serv- ice sectors can be improved through better planning and management, thus lead-  -6- ing to higher productivity and capacity utilization throughout the economy. At the same time, programs to expand domestic capacity are vital. In the case of tradeable commodities like coal, steel and cement, this is justified on the grounds of comparative advantage. For sectors such as irrigation, power and transportation, expansion of planned capacity in accordance with the require- ments of the rest of the economy will be vital to overall medium- and long-term development prospects. In the short term, however, achieving an adequate balance between supply and demand in these sectors will remain a difficult objective. 17. Under the Sixth Plan, India has an ambitious oil production program backed by substantial financial conmiitment. While the gap between domestic consumption of petroleum and production remains large, the prospects for progressive substitution of domestic petroleum for imports are quite bright. In 1981, and again in early 1983, resources for exploration and development were raised by successive price increases for domestic crude and products. India's dependence on oil imports dropped from 63% in 1979/80 to about 45% now and a scheduled expansion in production is expected to decrease oil imports (in crude equivalent terms) to about 33% of consumption by 1984/85. The rapidly expanding level of exploration activity, combinied with the possibilities for accelerated offtake from known fields, offers much encouragement for India's longer-term energy prospects. 18. Despite an expected continued decline in its current account deficits from the current 2.1% to about 1.7% of GDP by the late 1980s, India will require growing access to world financial markets to complement concessional assistance. These commercial sources of funds wqill be important in the future since India's current account deficits, though not large relative to the size of the economy, will nevertheless be large in absolute terms and will neces- sitate external borrowing beyond levels expected to be available from normal concessional sources. Given the favorable structure of India's external debt, which reflects the past reliance on concessional sources, India should remain creditworthy for a substantial growth in external borrowing. 19. India's development prospects over the next few years will hinge on the extent to which the economy can be brought into both internal and external balance, while at the same time achieving more rapid growth than in the past. In the longer term, income growth represents the best strategy for achieving thesie needed adjustments, both by generating higher savings for further investment, and by fostering the development of export and import-substituting industry to improve the balance of payments. In the short term, a relatively large external borrowing, including an increased emphasis on commercial borrowing, will be necessary to cope with the balance of payments consequences of such a growth strategy. Hcowever, an important element in providing India with the capacity to adjust flexibly will be adequate flows of concessional assistance. Although India is currently in a position to increase borrowing on commercial terms from the very low levels of the past, there are, of course, limits beyond which India will choose to sacrifice growth objectives rather than accept debt on unfavorable or unmanageable terms. The Government's effort to maintain an adequate rate of growth while adjusting the structure of the Indian economy to a more open and efficient environment requires foreign resources in addition to the level of commercial borrowing available to India. India is still a very poor country with a large rural sector and enormous investment requirements for human development and basic infrastructure. The fact that India has been able over the past seven years to maintain a rate of  -7- growth above the long term trend, despite the poor monsoons of 1979/80 and 1982/83, lends substance to the hope that a more open trade policy and con- certed efforts to remove constraiints on the growth of productive capacity, supported by adequate mobilization of savings both foreign and domestic, can sustain a rate of growth closer to 5.0% per annum than the long-run trend of 3.6% per annum. Combined with a reduction in the rate of population increase to below 2.0% per annum, a 5.0% growth rate would mean a doubling of the trend rate of growth of per capita income of less than 1.4% per annum. Success in these efforts would make a significant difference to the prospects of easing poverty in India. 20. A large and growing population and severe poverty underline the need to accelerate India's development efforts. The 1981 Census placed India's popula- tion at 683.8 million, or about 12 million higher than official projections. The fact that there was no decline in inter-census rates of population growth, equivalent to about 2.2% per annum, is a cause for concern. While further analysis of the Census may suggest this rate of growth to be slightly overestimated, the expectation of a measurable decline in the population growth rate has not materialized. Until the results of the Census are fully analyzed, firm judgements about the reasons for this outcome are not possible. However, the results re-emphasize the need for continuing efforts to strengthen the health and family planning program in a broad range of activities and services. These efforts are given high priority in the Sixth Plan, which aims at a rise in the proportion of protected couples in the reproductive age group from its estimated 1979/80 level of about 23% to over 35% by 1984/85. 21. Reduction of poverty remains the central goal of Indian econom.c growth. More than one-third of the world's poor live in India, and more than 80% of the Indian poor belong to the rural households of landless laborers and small farmers. About 51% of the rural population and 40% of the urban popula- tion subsist below the poverty line. Improvements in the living standards of the poor will depend to a large extent on the overall growth of the economy, particularly on increases in agricultural production and employment, and in non-farm rural employment. These developments will have to stem in large part from market forces which can be encouraged and reinforced by appropriate Government policies and the strengthening of basic services and infrastructure. The declining trend in real foodgrain prices between 1970 and 1981, resulting from India's sustained effort to raise agricultural production, reflects such developments. There is also a role for direct Government action in faster implementation of land reform (though the scope for significant reduction in poverty through land redistribution is quite limited in India), in increasing the supply of credit available to small farmers and rural artisans, and finally in broadening the provision of those services which enhance the human capital of the poor and improve living standards. Many of the latter are elements of the Minimum Needs Program, which has been an integral part of Indian planning for the past decade. Progress has been slow but steady in the expansion of primary education, the extension of rural health facilities and the provision of secure village water supplies. Operations such as the community health volunteer program and the national adult literacy campaign provide encouraging evidence that well-targetted, relatively low-cost programs can lead to enhanced prospects for India's poor.  -8- PART II - BANK GROUP OPERATIONS IN INDIA 22. Since 1949, the Bank Group has made 76 loans and 160 development credits to India totalling US$5,183 million and US$11,851 million (both net of cancellation), respectively. Of these amounts, US$1,387 million has been repaid, and US$6,224 million was still undisbursed as of September 30, 1983. Ban]k Group disbursements to India in the current fiscal year through September 30, 1983 totalled IUS$286 million, representing a decrease of about 2 percent over the same period last year. Annex II contains a summary state- ment of disbursements as of September 30, 1983 23. Since 1959, IFC has mDade 29 commitments in India totalling US$224 million, of which US$30 million has been repaicl, US$56 million sold and US$18 million cancelled. Of the balance of US$120 million, US$113 million represents loans and US$8 million equity. A summary statement of IFC disbursements as of September 30, 1983, is also included in Annex II (page 4). 24. The thrust of Bank Group assistance to India has been consistent with the country's development objectives in its support of agriculture, energy and infrastructure. Of particular importance have been investments in irrigation, extiension and on-farm development designed to increase agricultural productivity, and efforts to improve the availability of basic agricultural inputs to farmers through cre!dit, fertilizer, marketing, storage, and seed projects. Major elements of the lending program have also been directed at helping to meet the energy needs of the economy while curbing the growth of oil imports, and to ease the infrastructure bottlenecks which have hampered economic growth in India, particularly through power generation and distribution, and railways and telecommunications projects. The Bank Group has also provided financing for a broad range of medium- and small-scale industrial entierprises, primarily in the private sector, through its support of develop- ment finance institutions. Recognizing the importance of improving the ability to satisfy the essential needLs of urban and rural populations, the Bank Group has supported nutrition and family planning programs, a rural roads project, as well as water supply and sewerage and other urban infrastructure projects. 25. This pattern of assistance remains highly relevant, and consonant with Government priorities, ass reflected in the Sixth Plan. The continued active involvement of the Bank Group in agriculture, energy and infrastructure development will appropriately contribute to India's adjustment and growth prospects. Irrigation will need continuing support, with emphasis on improved efficiency in water conveyance systems to ensure reliable delivery to farmers' fields. In addition, major investments to develop the large Narmada River basin will be vital to India's efforts to increase agricultural production. Important complements to these efforts, such as fertilizer production and distribution, agricultural credit and extension, will continue to receive support. A continued program of investments aimed at rapidly increasing the domestic supply of energy will clearly be necessary if India is to curb the cost of oil imports and alleviate the critical power shortages which constrain output in both the agricultural and industrial sectors. Exploitation of oil and gas resources is a central element of this program, which should be supple- menczed by investments in hydro and thermal powe!r generation, and in the expan- sioII of the transmission and distribution networks. Industrial projects to increase the domestic production of basic commodities, which have been in short supply and which India has a comparative advantage in producing, should also receive high priority. Finally, raising the efficiency and levels of transpor-  -9- tation infrastructure would mitigate a key constraint to achieving higher levels of economic growth so that further support of the railways and for ports development will be particularly appropriate. 26. The need for a substantial net transfer of external resources in support of the development of India's economy has been a recurrent theme of Bank economic reports and of the discussions within the India Consortium. Thanks in part to the response of the aid community, India successfully adjusted to the changed world price situation of the mid-1970s. However, there is now a need for increased foreign assistance to India, not only to help the economy adjust to the more recent oil price increases and the overall deterioration in the world trade environment but also to maintain the rela- tively higher growth rates achieved during the first two years of the Sixth Plan. As in the past, Bank Group assistance for projects in India should aim to include the financing of local expenditures. India imports relatively few capital goods because of the capacity and competitiveness of the domestic capital goods industry. Consequently, the foreign exchange component tends to be small in most projects. This is particularly the case in such high-priority sectors as agriculture, irrigation, and water supply. 27. India's poverty and needs are such that whenever possible, external capital requirements should be provided on concessionary terms. Accordingly, the bulk of the Bank Group assistance to India has been, and should continue to be, provided from IDA. However, the amount of IDA funds that can reasonably be allocated to India remains small in relation to India's needs for external support. This requirement for additional assistance can be met, in part, through Bank lending. Given its development prospects and policies, India is judged credit-worthy for Bank lending to supplement IDA assistance. A con- tinuation of efforts already underway to achieve growth in productive capacity, trade expansion, higher levels of savings, foodgrains self-sufficiency and a reduction in the rate of population growth should result in continued economic growth and improvement in the balance of payments. Despite recent setbacks, India's external payments position is still manageable. The ratio of India's debt service to the level of exports was about 11% in 1982/83 and is projected to remain below 20% through 1995/96. As of September 30, 1983, outstanding loans to India held by the Bank totalled US$3,932 million, of which US$2,100 million remain to be disbursed, leaving a net amount outstanding of US$1,832 million. 28. Of the external assistance received by India, the proportion con- tributed by the Bank Group has grown significantly. In 1969/70, the Bank Group accounted for 34% of total commitments, 13% of gross disbursements, and 12% of net disbursements as compared with 50%, 43% and 53%, respectively, in 1981/82. On March 31, 1982, India's outstanding and disbursed external public debt was about US$17.9 billion, of which the Bank Group's share was US$7.1 billion or 38% (IDA's US$5.9 billion and IBRD's US$1.2 billion). In 1981/82, about 16.0% of India's total debt service payments were to the Bank Group.  PART III - THE ENERGY SECTOR General 29. Commercial primary energy (coal, oil, gas, hydro and nuclear power) accounts for about 46% of total energy consumption in India, with the balance (54%) being derived from non-commercial sources, predominantly firewood and agricultural and animal wastes. Over the past ten years, the growth of energy consumption in India averaged 4% per annum, which was marginally higher than the GDP growth for the period. Over the same period, commercial energy consumption increased by 5.3% per annum. Per capita consumption of commercial primary energy is about 166 kg of oil equivalent, or half the average for low-income developing countries. The share of oil products in commercial primary energy consumption, at 33%, is low compared to other developing countries but is growing rapidly. 30. Coal is the most abundant indigenous energy resource and remains the most important domestic source of commercial energy in India. Coal production, which stagnated between 1976/77 and 1979/80 because of power shortages, delays in commissioning new mines, labor difficulties and transportation bottlenecks, has risen substantially from about 104 million tons in 1979/80 to 131 million tons in 1982/83. At this level of production, India is the sixth largest producer of coal in the world - but production remains about 4 million tons per year less than demand. However, inadequate supplies of all forms of energy has been a major constraint hindering India's economic growth. Petroleum 31. Petroleum reservoirs are found in sedimentary basins. In India, there are 27 sedimentary basins with a total area of approximately 1.7 million sq. km, of which a'bout 1.4 million sq. km (81%) are onshore and the remainder offshore (to a water depth of 200 meters). Commercial petroleum production has been established in only three sedimentary basins, viz., the Upper Assam Shelf in north-eastern India, the Cambay basin in Gujarat, and the Bombay offshore basin which has several petroleum fields, namely, Bombay High, North Bassein (Panna), South Bassein, Heera and Ratnagiri (Ratna). Many of India's potential petroleum-bearing areas remaini less than fully explored and production is concentrated in only a few regions. Historically, the pace and scope of exploration activity has been uneven and resources have been concentrated on a few promising areas. Since the discovery of the giant Bombay High field off the West Coast oE India in the mid-1970s, India has not made a new major commercial discovery. Ongoing exploration efforts of ONGC, however, have been encouraging and have identified several petroleum- bearing areas which need further exploratory drilling to determine their commercial potential. Indications of petroleum have been found in eight other basins: Krishna-Godavari, Cauvery, Rajast-han, Bengal, Andaman Islands, Himalayan Foothills-Ganga Valley, Tripura Fold Belt, and the Assam-Arakan Fold Belt. Furthermore, four other basins are considered  -11- prospective on general geological grounds, although hydrocarbons have not yet been discovered. These basins are Saurashtra, Kutch, Konkan-Kerala and Mahanadi. The Krishna-Godavari and Cauvery basins indicate the most promising undeveloped potential to date. 32. Estimates of India's potential total recoverable hydrocarbon reserves are 4.5 billion tons of oil equivalent (toe), of which about two-thirds are located offshore and of which about 75% is expected to be in the form of natural gas. Proven and probable recoverable hydrocarbon reserves are currently estimated at about 800 million toe of which about 470 million tons is oil and the remainder (about 330 million toe) is natural gas. Natural gas is becoming increasingly important to the Indian economy with the development of the Bombay High oilfield with its associated gas flows and planned development of the large offshore South Bassein gas field. Gas consumption in 1982/83, is estimated at 1.5 mil- lion toe, and is forecast to rise to about 6.8 million toe by 1989/90. 33. Crude oil production from domestic reserves has increased steadily over the past 20 years from 0.45 million tons in 1960/61 to almost 7 million tons in 1970/71 and an estimated 26 million tons in 1983/84. Consumption of crude oil grew at about 6.5% per annum over the past five years, and will reach an estimated 40 million tons in 1983/84. Imported crude oil is expected to account for 14 million tons, or about 35% of consumption this year. The import bill for crude oil and petroleum products this year is estimated to be over US$4.6 billion, representing 32% of total merchandise imports and 58% of India's merchandise export earnings. By the end of the Sixth Plan period (1984/85), consumption -s expected to reach about 44 million tons per year. This would exceed expected domestic production by about 14 million tons on the basis of expected production from known petroleum reserves. 34. While there are good prospects for increasing production from existing fields, both onshore (the subject of this project) and offshore, India's dependence on crude imports could increase from a low of 33% of its crude oil requirements in 1984/85 to about 50% in the early 1990's unless there are major new discoveries developed in the next few years. Thus a concerted effort to accelerate exploration and improve the efficiency of existing production facilities is of vital importance and is a central objective of Government policy. To this end, the investment programs of ONGC and Oil India Limited (OIL), the Government-owned institutions engaged in exploration and development of hydrocarbon resources, have been stepped up. The Sixth Five-Year Plan (1980/81-1984/85) originally allocated about US$3.7 billion 1/ for petroleum exploration and development, which itself represented an increase of almost 50% in real terms over the previous Plan. Revised allocations for the Plan period are now about US$6 billion 1/, a further increase of more than 60%. 1/ In 1980/81 prices.  -12- Petroleum Pricing 35. India is fully aware of the need to conserve energy and, to this end, the Government has consistently set petroleum prices at levels designed to ensure efficient energy use. Domestic petroleum product and crude oil prices are regulated by the Government. The crude oil price paid by the Government to ONGC and OIL (in effect - a transfer price) was raiSed in July 1981 from US$6.10 per barrel (Bbl) to US$17.30/Bbl and ensures satisfactory profits for the companies. In 1982/83, ONGC's profit per barrel of oil, at US$4, was in line with the average for international oil companies. The profits, which are expected to increase to US$5/Bbl by 1984/85, provide adequate cash flow to enable 0NGC and OIL to finance a major portion of their investment programs from internally-generated funds and compete equitably in the commercial markets with other foreign oil companies for borrowed funds. All exploration and development decisions are based on international prices, and hence the lower crude oil transfer price does not act as a disincentive to exploration and development. Under the production-sharing contracts, foreign oil companies receive the full. international price of their share of production. Retail product prices have been maintained, on average, at or above international levels. For example, gasoline, which retails for about US$1.12 in the USA, retails for US$2.31 per gallon in India. At the present time, therefore, both the level and the structure of petroleum prices in India is satisfactory and is the subject of regular review under the termns of the Second Bombay High Project approved by the Board in December 1980. 36, Natural gas is currently sold directly by the producers (ONGC and OIL) to the consumer on the basis of long-term contracts that require Government approval. The Government and ONGC follow the principle, to the extent possible, that gas is priced competitively in terms of the energy- equivalent price relative to the alternative fuel for which it is substituting. On this basis, associated offshore gas, which accounts for 55% of all gas sales, is priced between US$1.49 and US$7.44 per thousand cubic feet; the lower price applies to interruptible supplies to power plants otherwise using coal or high sulfur heavy fuel oil and the higher prices apply to guaranteed supplies to industry and fertilizer plants. The average price for offshor,e free gas is about US$3.83 per thousand cubic feet, which is well above its production and delivery costs and, in energy terms, is in line with the international price of fuel oil. Onshore gas from Gujarat, which accounts for 20% of present gas sales, is priced at an average of only US$0.95 per thousand cubic feet due to the low prices stipulated in old long-term contracts. ONGC intends to increase the price as these contracts expire or are renegotiated. For onshore gas from Assam, which accounts for about 25% of gas sales at present, the average price is about US$0.43 per thousand cubic feet, reflecting the surplus associated gas which is being flared due to the small size of the market in that isolated region. The structure of gas prices and their expected trend in the near future is currently satisfac- tory but is the subject of regular review under the terms of the South Bassein Gas Development Project approved by the Board in February 1983.  -13- Sub-sector Institutions 37. Within the Government, the Ministry of Petroleum, is charged with policy-making in the petroleum sector. Together with the Ministry of Finance and the Planning Commission, it approves all investments and the budgets of public companies operating in the sector. ONGC and OIL, both public sector undertakings, are engaged in the exploration for, and development of, hydrocarbon resources. Another public entity, the Indian Oil Corporation, handles India's crude oil imports. The Oil Industry Development Board (OIDB) is a financial institution which obtains funds through a cess levied on domestic crude production and provides some financing for public sector enterprises engaged in petroleum exploration, production and refining. Petroleum Exploration and Development Policies and Investment Strategy 38. To develop and efficiently utilize its petroleum resources, the Government's investment program aims to: (i) accelerate exploration programs by both foreign and national oil companies; (ii) increase produc- tion from existing oil and gas fields, primarily by accelerating the development programs of ONGC and OIL in areas where petroleum has already been discovered; and (iii) develop the gas pipeline system and encourage gas-based industries (e.g. fertilizer and petrochemical plants) to util- ize the substantial untapped gas resources. 39. In order to accelerate exploration activity and to encourage foreign oil company participation, thirty-two blocks, each ranging in size from 10,000 to 30,000 sq. km offshore and onshore, were offered to inter- national bidders in late 1980. The total area offered, almost 900,000 sq. km, represented about 50% of the country's sedimentary basin area. One production-sharing agreement was signed with a consortium led by Chevron (USA) for a 18,500 sq. km block in the Saurashtra basin off- shore Gujarat, north of the Bombay High field. The terms of the produc- tion sharing agreement provide for Chevron to drill at least three wells, spending a minimum of US$29 million over a thee-year period, at its own risk. Upon commercial discovery, ONGC may assume up to 50% joint venture in future development (without payment of exploration costs), and produc- tion will be split according to a scale which escalates with field profitability. Until India achieves self-sufficiency in oil, GOI has the option to purchase Chevron's share of the oil produced at international prices. 40. Invitations to bid on a second round of offerings were issued in August 1982. The second offering included about 50 blocks both onshore and offshore and included new areas west of the Bombay High field and the outer shelves of the Krishna-Godavari and Mahanadi deltas. Unfortunately, this second offering coincided with the world-wide decline in exploration investment by international oil companies, (IOC's) and a perception by them that the Indian sub-continent is not as attractive a proposition as other areas at this time. The net result was that, of 37 companies invited to bid, only a few responded. Discussions, however, are continu- ing with two of these bidders. With no upsurge expected soon, India's accelerated investment program, in the near term, will depend largely on  -14- ONGC's and OIL's ability to undertake and successfully manage large and complex investment programs. Nevertheless the initial steps in opening up prospective acreage to private oil companies have been taken and GOI has confirmed its continuing coimmitment to its "open door" policy. Renewed interest by the IOC's could result from a major discovery by ONGC or Chevron in or adjacent to the areas offered. The Government is also considering several ideas to attract private initiatives for exploration. One such idea is for ONGC's subsidiary, Hydrocarbons India Limited, to form joint-ventures with both foreign and local private companies to undertake exploration projects. 41. To increase production from existing fields, GOI extensively reviewed its exploration, production and utilization strategies for the Cambay Basin (and other areas) with the Bank and expressed its interest in undertaking some pilot enhanced oil recovery schemes for the heavy oil fields in the northern section of the Cambay ]3asin. Subsequently, the dialogue between ONGC and Bank staff expanded to include the full evalua- tion of the petroleum producing potential of this mature, mostly onshore, basin, as well as the operational and technological priorities to rapidly increase production, modernize the operations, and develop a program of optimal oil and gas recovery in the basin. GO)I is also rapidly expanding the production of fertilizers and petrochemicals based on the expected natural gas availability from the South Bassein and other fields and is currently examining a gas distribution pipeline of some 1700 km length to ensure optimum utilization of the gas. The Bank's Role and Lending Strategy in the Petroleum Subsector 42. The Bank's objective for participating in the energy sector in India is that any involvement should be aimed at increasing the efficiency with which scarce resources are utilized; decreasing India's dependence on imports; and enabling the transfer of appropriate technology while, simul- taneously building up local expertise through training and other forms of foreign-local collaboration. Most of the Bank's lending operations to India in the sector have been in the power subsector--31 Bank/IDA operations, totalling US$3.7 billion spanning a 34-year period. The Bank's involvement in the petroleum subsector however has grown substan- tially within the last six years. Four loans have been made to ONGC, including two for the development of the Bombay High Field 1/ (US$550 million in all); one for exploration in the Krishna-Godavari basin (US$165.5 million)2/, and another for offshore gas development in South Bassein (US$222.3 million)3/. A loan (US$200 million) has also been made for the modernization of several refineries.4/ 1/ Loan No. 1473-IN, approved in June 1977; and Loan No. 1925-IN, approved in December 1980. 2/ Loan No. 2205-IN, approvied in October 1982. 3/ Loan No. 2141-IN, approved in February 1983. 4/ Loan No. 2123-IN, approved in April 1982.  -15- 43. Each project was designed to address a specific set of issues in the subsector. (i) Planning: the first Bombay High Project aimed at establishing the basis for a sound long-term development program for Bombay High, the most important oil field in India, initiating the early development phases in an optimal manner, and establishing ONGC as a strong, well-managed company that could be attractive to the commercial financial markets. (ii) Institutional Development: the Second Bombay High Project was aimed at providing ONGC with appropriate managerial capabilities while accelerating the development of the Bombay High field at the time of rapid increase in oil prices. A Project Performance Audit Report (No. 4139, October 11, 1982) was issued to the Executive Directors that favorably reviewed the first project--and made recommendations for strengthening ONGC and its modus operandi--recommendations that were incorporated in the later projects.l/ The second loan has also proceeded satisfactorily--with production of crude oil and gas substantially exceed- ing that forecast at appraisal. Disbursements will be completed by mid- 1984--about 9 months behind schedule due to some modifications in the project scope and delays in equipment delivery for the onshore and support facilities. (iii) Technology Transfer and Gas Utilization Strategy: the South Bassein Gas Project introduced ONGC to the complex technological problems of offshore gas production and set the initial conditions for the creation and development of India's gas infrastructure and marketing issues. During the preparation of the project the Bank discussed with GOI, ONGC and its consultants, the scope of market studies to be carried out and has been instrumental in demonstrating the benefits of a wider utilization of gas. As a result, the main components of that project have been optimized in terms of the anticipated market. This dialogue is continuing during project supervision as GOI formulates a long-term gas strategy designed to accelerate the development of free and associated gas reserves, based not only on the use of gas as feedstock in the fertilizer industry, but also on the use of gas as boiler and household fuel if this proves economic. (iv) Encouraging use of foreign oil companies: the Krishna-Godavari Exploration Project provided a framework within which ONGC's exploration strategies as well as the GOI's policies with respect to the balance between national and private resources could be addressed. While not formally associated with the process, the Bank has been instrumental in increasing the attractiveness of the offering of the exploration areas to IOC's (the seven proposals received in the 1980 offering were for two blocks added at the suggestion of the Bank). Through this project, the first major basin exploration project undertaken by ONGC, the Bank has, to a considerable extent, assisted in minimizing the risks of the Krishna-Godavari exploration among the onshore, shallow offshore and deep offshore portions of the project area. 1/ The one suggestion that was not implemented (that ONGC, rather than GOI, be the "borrower" of Bank funds directly) was discussed in detail with GOI but runs counter to Government policy with respect to all foreign borrowings from official sources--and has not proved detrimen- tal to ONGC's financial reputation.  -16- PART IV - THE PROJECT Obiectives and rationale for Bank Involvement 44. The project represents ONGC's first major effort at increasing production from an existing field and, as mentioned in para. 41 above, hais requested Bank assistance in reviewing its exploration, production and utilization strategies fior the field. During the course of this review, the design and scope of the project haLs changed significantly: the initial development of the heavy oil fields, the seismic survey components, the very substantial training component and the extensive use of foreign expertise in the technologically-critical phases of the project all resuLt from the Bank's involvement with ONGC in developing the project. Continued involvement throughout project execution will ensure that optimal decisions are taken at each stage of the project implement:ation. 45, The proposed project was appraised in September 1983. The Staff Appraisal Report (No.4928-IN) dated March 8, 1984 is being distributed sepa:rately to the Executive Directors. A Supplementary Data Sheet appears as Annex III. Negotiations were held in Washington, DC in March 1984. The 3orrcwer, and ONGC were represented in a team coordinated by Mr. Chatterjee of the Department of Economic Affairs within the Ministry of Finance. .TheCapa =E Basin 46. The Cambay basin (see Map 17603) is a 400 km long by 80 km wide sedimentary basin lying roughly north-south in the State of Gujarat. A portion (about 20%) of the basin is located in near-shore tidal and shal- low water areas of the Gulf of Cambay. Production from the basin com- menced in 1960 and cumulative production through 1983 was about 34 million toe, 90% of which was oil, the remainder, gas. Current production averages 3.2 million tons of oil and 0.6 million toe of gas per year. Akbout half of the production comes from one field--the Ankleshvar field-- which has now passed its peak productive years and is showing a 25% drop in annual output. Much of the remaining oil to be recovered is "heavy" oil of about 18 degree API gravity and a viscosity range of 100 to 500 cent:..poise,l/ located in the northern part of the basin--in the Santhal, Balol and Lanwa fields. More than 25 other fields--mostly small and isolated--have been identified but not evaluated using modern techniques. Some portions of the basin have not yet been surveyed or drilled. 47. The project would coimprise the following components: (a) Exploration: (i) seismic survey, using modern technology, of tne shallow water, tidal flats and shoal areas of the Cambay Gulf. About 1750 line-kilometers of data would be acquired; and (ii) deep 1/ Oil with an API gravity range of 20 or less, and a viscosity of 100 centipoise or more, is considered "heavy oil".  -17- exploratory drilling of 4 wells to extend the knowledge of the subsurface from the currenit 3000 meters to 5000 meters depth in highly prospective areas. (b) Development and Production: (i) complete the development schemes of several light oil fields namely: Kalol, North and South Kadi, Sobhasan and Nawagam involving 247 new wells producing an incremental 0.8 million tons of oil; (ii) commence the development of three known heavy oil fields namely: North Santhal, Balol and Lanwa involving about 287 wells producing an incremental 0.75 million tons of oil; (iii) rehabilitate the existing Cambay gas field involving 14 wells to reverse the decline in current production rates; and (iv) institute major improvements to the well maintenance (workover) operations to eliminate the backlog of 345 existing wells needing repair and to upgrade the main- tenance standards thereby increasing the oil production by about 0.3 to 0.4 million tons per year. The backlog will be eliminated over a 5-year period by replacing obsolete workover rigs, purchasing new rigs and con- tracting part of the work to outside groups. (c) Enhanced Oil Recovery (EOR) Pilot Schemes: Three pilot schemes are proposed: two thermal EOR (in-situ combustion) pilots in the Lanwa heavy oil field and a polymer chemical flood pilot in the Jhalora light oil field. The pilot operations are expected to last about four years and are timed to produce solutions to remedy the progressive decline in field production expected to become acute towards the end of the decade. An expected result of the EOR pilot test is a substantial increase in the volume of heavy oil produced from the Cambay Basin. Advanced planning for the utilization of this additional oil is essential and GOI would undertake, by March 31, 1985, a heavy oil utilization study, discuss the findings with the Bank and take the necessary steps to ensure the utilization, or sale, of the heavy oil (Section 4.03, Loan Agreement). (d) Technical Assistance and Training: ONGC, with foreign assistance, would institute an extensive field-level staff training program that is optimally sized to the project's needs and covers all facets of oil-field operations--drilling, production, cementing, logging, pipelines, instrumentation and well stimulation techniques. Expatriate assistance would also be provided for the introduction of the new tech- nologies required in the application and evaluation of EOR methods, and as required, also in mud and reservoir engineering, workover techniques and formation testing. Experienced international contractors in drilling and well services would be used where local capabilities are not adequate or conversant with the technologies to be employed. Project Costs and Financing 48. The financing requirements of the project, including contingencies, price escalation and front-end fee, are estimated at US$954.3 million of which US$545.8 million represents the foreign exchange costs. Taxes and duties included in the above costs are estimated at US$150.0 million. Contingencies were determined on the basis of the following assumptions and projections:  -18- (i) Physical contingencies: EOR and Exploration - 20% Drilling expenditures - 15% Equipment and Technical Assistance/Training - 10% (ii) Price contingencies,: FY84/85 FY85186 FY86/87 F