Argentina - Gas Utilization and Technical Assistance Project

Document of The World Bank FOR OFFICIAL USE ONLY Lo . 259 2 - fl Report No. P-4059-AR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INLERNATIONAL BARK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$180.0 MILLION TO YACINIENTOS PETROLIFEROS FISCALES WITH THE GUARANTEE OF THE ARGENTINE REPUBLIC FOR A GAS UTILIZATION AND TECHNICAL ASSISTANCE PROJECT June 3, 1985 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit - Pe80 Argentina ($a) US$1.00 - $a 270 $a 1.00 - La 0.0037 (March 1, 1985) WEIGHTS AND MEASURES Bbl - Barrels (42 US gallmns, 159 liters) BCF = Billiccn Cubic Feet BD m Barrel per Day CFD = Cubic Feet per Day m3 - Cubic Meter MT = Metric Tcc TOE = Tcns cf Oil Equivalent ABBREVIATIONS AND ACRONYMS CNG = Ccnpressed Natural Gas GdE = Gas del Estado LPG = Liquified Petrcleum Gas (propane/Butane) YPF = Yacimient s Petrolifercs Fiscales FISCAL YEAR January 1 to December 31 "M" preceding any unit indicates thausands. "NM" preceding any unit indicates millioms.  FOR OFFICIAL USE ONLY ARGENTINA GAS UTILIZATION AND TECKNICAL ASSISTANCE Loan and Project Summary Borrower: Yacimientos Petroliferos Fiscales (YPP) Guarantor: Republic of Argentina Amount: US$180.0 million-equivalent Terms: Repayable in 15 years, including 3 years of grace, at the Bank's standard variable interest rate. Guarantee Fee: 1 percent Project Description: The project is part of the YPF's 1985-89 investment program for increasing the production of gas and associated liquids and expanding the use of gas. The proposed loan would finance the expansion of liquid recovery facilities, compression and other units to optimize gas production; two pipelines for crude and petroleum products transportation; enhnnced oil recovery pilot projects; equipment for compressed natural gas (CNG) vehicle refilling stations; and consultants' services for technical assistance to YPF. US$2 million of the loan proceeds would be transferred to the Energy Secretariat of the Works Ministry for technical assistance to improve energy planning. The project will help (a) substitute natural gas for petroleum products; (b) reduce gas wastage; (c) increase oil production from declining reservoirs; (d) eliminate bottlenecks in the transport system for liquids; (e) improve the basis for potential natural gas exports; and (f) strengthen YPF's finAnces and improve its financial management and control. Beneficiaries: The project would generate foreign exchange savings by permitting the extraction of larger quantities of liquids from increased production of natural gas and reducing the potential need for costly imports. Greater gas use would also lower the cost of domestic energy use. Benefits would accrue to the economy at large. Risks: The risk in the implementation of the liquid recovery facilities is considered low because of YPF's substantial experience in these kinds of projects. While CNG operations would be new in Argentina, an experienced foreign firm would assist in carrying out I This document has a reswitd disrbution and may be used by recipients only in the performance of | their offiial duties. Its contenis may not otberwise be disclosed without World Bank authorization.  - ii - this component, which would be done with frequent reviews. The economic justification of the Campo Duran component would not be affected materially even if there were difficulties in completing funding arrangements for the related expansion of the northern pipeline. (US$ million) Estimated Project Cost Local Foreign Total lorthern Gas System: - Field development 71.5 9.4 80.9 - Pipeline expansion 113.7 40.6 154.3 - Campo Duran 63.1 47.8 110.9 Debottlenecking & Enhanced Recovery 57.9 35.6 93.5 Pipelines 106.5 26.1 132.7 CNG Facilities 4.7 7.9 12.6 Technical Assistance 2.4 7.1 9.5 Base Cost: 419.8 174.5 594.3 Physical Contingencies 39.2 16.2 55.5 Price Contingencies 76.0 30.0 106.0 Total project cost 535.0 220.8 755.8 Interest During Construction 16.0 30.8 46.8 Total Financing Req7i.rement 551.0 251.6 802.6 Financing Plan IDB - 59.5 59.5 IBED - 180.0 180.0 YPF/P:ivate Producers 92.6 12.1 104.7 YPF/Government 319.6 - 319.6 Gas del Estado/Government 138.8 - 138.8 551.0 251.6 802.6 Estimated Disbursements Bank FY 86 87 88 89 Annual 25 55 60 40 Cumulative 25 80 140 180 Economic Rate of Return: Campo Duran, 30 percent; CNG, 50 percent Appraisal Report: 5053-AR dated June 4, 1985  INTERNATIONAL BANK FOR RECONSTRUCT'_-ON AND DEVELOPMENT REPORT AND RECOMMENDATION OF TH3 PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN OF US$180.0 MILL'.:OB TO YACINIENTOS PETROLIFEROS FISCALES WITH THE GUARANTEE OF THE ARGENTINE REP JBLIC FOR A GAS UTILIZATION AND TECHNICAL ASSISTANCE PROJECT 1. I submit the following report and recommendation on a proposed loan to Yacimientos Petroliferos Fiscales (YPF) with the guarantee of the Argentine Republic for the equivalent of US$180.0 million to help finance a Gas Utilization and Technical Assistance project. The loan would have a term of 15 years, including 3 years of grace, at the Bank standard variable interest rate. The Government of Argentina would charge YPF a guarantee fee equivalent to 1 percent of the interest charged on the Bank loan. US$2.0 million would be transferred to the Government's Energy Secretariat for the energy planning compouent of the proposed project. I. THE ECONOMY 2. An economic mission visited Argentina in June/July 1983 and its report (4979-AR) was distributed to the Executive Directors in June 1984. This report reflects the mejor findings of that mission and subsequent updating missions. Country data sheets are presented in Annex I. Background 3. Argentina has rich natural resources, a highly literate population organized in an export-oriented and diversified agriculture, and a large industrial sector. The economic performance of the country has suffered, however, from the policy instability and distortions of incentives introduced by frequently changing governments. Public sector participation in the economy is high, industrial production is largely domestic market-oriented, and the economy does not use the resources at its disposal efficiently. A large public sector deficit contributes significantly to the country's currently very high inflation level. Economic Developments of the Last Decade 4. Over the last decade, abrupt shifts in economic policies weakened Argentina's productive capacity and exacerbated structural imbalances. Changes in policies produced large and rapid fluctuations in the real exchange rate, real interest rates, and real salaries. The rate of inflation was over 400 percent in 1976, fell to 100 percent in 1980 and accelerated again to about 600 percent in 1984; the external trade balance as a share of GDP has fluctuated between positive 4.8 percent and a negative 4.3 percent, while annual GDP growth has ranged from plus 6.7 percent to minus 6.2 percent.  - 2 - 5. With the exception of agriculture, which has fared well during the current crisis, the productive sectors are beset by increasingly thorny structural and financial problems. More than 40 percent of capacity in the construction industry, artificially inflated during the construction boon of the late 1970s, now stands idle. Capital equipment is also idle in many manufacturing industries and is becoming increasingly obsolete; most firms lack sufficieut working capital. Financial intermediation is costly and inefficient, and financial institutions are suffering severe difficulties. Argentina's self sufficiency in oil has deteriorated as the ratio of oil reserves to annual output has declined. Proven reserves of gas have increased, but the processing and transport infrastructure to exploit them is deficient, resulting in extensive flaring. . 6. The public sector is simultaneously overstaffed and seriously short of managerial and technical expertise. Ineffective tax admirniBtration, together with inadequate budgeting and investment planning processes has contributed significantly to the large public sector deficit. Cuts in public investment to curb the public sector deficit have led to a deterioration of social infrastructure, have jeopardized the reliatility of power supply, and forced reductions in petroleum production and gas exploration and development. 7. High and rising inflation, erosion of the country's productive capacity, major dislocations in industrial production and huge external debt service requirements have produced general economic stagnation; such that the real 1983 per capita GDP was 14 percent lower than its 1974 level. Heavy borrowing in the late 1970s multiplied the country's external debt as a share of GDP sevenfold (from 10 percent to 68 percent). Today, interest payments on the external debt absorb nearly half of gross domestic savings compared to less than 5 percent in the early 1970s. Policies for Adjustment 8. Economic mismanagement and the consequences of the 1982 South Atlantic crisis hastened the departure of the military government and led to a democratically elected Government taking office at the end of 1983. Among the economic difficulties to be faced was the severe liquidity problem of private industry, which obstructed economic recovery and threatened the solvency of the financial system. Other pressing difficulties were riaing inflation and the worsening external payments situation. 9. The new Government entered into a 15-month stand-by agreement with the Fund in September of 1984 and rescheduled its external debt with official creditors, covering interest and principal up to 1985, and with the commercial banks, covering principal up to 1985. It also obtained the commitment of US$4.2 billion in fresh money to finance the current account deficit and to eliminate arrears accumulated through 1983-85 by the end of 1985. The principal objectives of the stabilization program underlying these agreements were to lower the rate of inflation from an average of about 20 percent per month in the last quarter of 1984 to about 8 percent a month by the end of 1985, and to achieve a balance of payments position that would enable Argentina to meet its external obligations while satisfying the needs of domestic recovery.  10. The main performance targets under this progrAm were to reduce the cash deficit of the non-financial public sector and the operating losses of the Central Bank to 5 percent of GDP in 1985 (compared to a peak of nearly 18 percent in the fourth quarter of 1983); hold monetary growth several percentage points below the targeted rate of inflation; achieve an external resource surplus of US$4-3 billion in 1965 (compared to a surplus of US$3.7 billion in 1984); and eliminate arrears to commercial banks towards the end of 1985. The program also stipulated that public sector tariffs would not be reduced in real terms below their level at the beginning of 1984; that the exchange and trade system would be liberalized; and that regulated interest rates on deposits would be approximately zero in real terms, while intervention in credit markets would be reduced. The program implied a depreciation of the peso in real terms and a reduction in real salaries. 11. The Government moved to comply with these conditions, despite a deepening recession. The fiscal deficit was reduced to 13 percent of GDP during the last quarter of 1984. Monthly wage indexation was reduced to 90 percent of the previous month's inflation, from 100 percent earlier, and the real exchange rate was improved by 3.3 percent on an end-year basis. Prices, however, rose by 19.7 percent during December 1984, compared to 17.7 percent in December 1983. Output and employment in all productive sectors dropped severely towards the end of 1984. The value of exports fell, as both domestic output of exportables and the international prices of most of Argentina's exports declined. Thus, the 1984 balance of payments resource surplus fell below its target level, as did tax revenues. 12. Because of shortfalls from the agreed targets, the Fund suspended the first conditional draw-down under the stand-by until the completion of the 1985 first quarter review of the program. The acceleration of price increases in early 1985, fueled in part by stepped-up real devaluation, eliminated the possibility of compliance with the nominal limits of the program set for the first quarter of 19B5. The resurgent inflationary pressures were partly the result of the elimination of the freeze on industrial prices and of real increases in public tariffs. They also reflected the difficulties of reducing the public deficit in a situation of declining incomes and high debt service requirements and of reversing inflationary expectations. 13. The Government is presently renegotiating the targets of the stand-by with the Fund. It has stated its intention to adopt more stringent demand management policies while at the same time strengthening its external sector policies to offset the negative effects that stabilization produces on growth. Although reducing inflation will take somewhat longer than had been intended originally, the revised targets should enable Argentina to get back into formal compliance with the Fund, move to eliminate external payment irregularities, and gradually restore incentives which foster investment and production. To this effect, the Government has increased petroleum prices and transport and power sector tariffs, initiated a 12 percent cut in public expenditures this year, frozen employment in the public sector, and reorganized major state enterprises to reduce costs and improve operating efficiency. It has also relaxed regulations to reduce capital markets  - 4 - segmentation, freed some regulated interest rates and moved to increase real interest rates on other credit lines still regulated. Another major package of initiatives is expected with regard to the external sector in the near future. In addition, a tax reform proposal has been presented to the Congress. Policies for Growth 14. The Government has formulated an overall policy framework that links the stabilization program to development goals. The strategy for achieving a GDP growth rate of 3 percent per annum over 1985-90 is based or raising productive investment and expanding exports. The proposed policy measures are closely in 'line with the recommendations of the 1984 CXK, viz., improvement in public sector finances and efficiency; overhaul of the tax system and tax administration; reduction in the number of public enterprises and reform of government-enterprise relationships; improvements in incentives for the private sector; enhanced export promotion, including a scheme for temporary admission of imports needed to produce exports, and elimination of most subsidized investment incentives. Real per capita consumption is projected to rise only 0.6 percent per annum on average during 1985-90, s0 that domestic savings rise sufficiently to finance the projected average increase of about 6 percent per annum in fixed investment. The Government is now in the process of giving this strategy concrete operational content and in defining the instruments for its achievement. It has proposed a freeze on the relative share of wage income in GDP during 1985; a mechanism under which industry contains its price increases while Government price controls are phased out; real increases in the overall tax burden and in public sector tariffs; and a new and less heavily subsidized industrial incentive system. At the same time, the Government has promised to improve public sector management; reform labor legislation, enhancing collective bargaining; introduce a national health insurance system; and provide greater equity through profit-sharing mechanisms. Development Prospects and Policy Requirements 15. Argentina's growth performance in the next five years will depend heavily on the Government's success in sharply cutting the public sector's fiscal deficit, reducing inflation and restoring domestic and overseas confidence in economic management. High inflation and general uncertainty have produced a paralysis of private sector investment decisions. Thus, stabilization is a sine qua non for the country's future growth and development. 16. At the same time, external interest payments absorb almost 50 percent of Argentina's gross domestic savings. Until this burden is reduced, investment will be limited largely to improving the efficiency of existing capacity and completing unfinished projects. The Government has stated that it will give priority to those ongoing and new projects which alleviate immediate bottlenecks, have a high rate of return, can increase foreign exchange generation and stimulate domestic production. 17. Argentina's key development objectives are: to strengthen and expand the growth of exports, in order to reduce the country's external debt relative to GDP and exports, and to resume medium-term growth as the  - 5 - stabilization program takes hold. The Government's economic program and policies are being designed to achieve these objectives. In particular, special emphasis is being given to the elimination of distortions to produce a rapid output and export response. A faster recovery of per capita consumption can take place only once medium-term growth has resumed. Growth and Balance of Payments Prospects 18. With a successful implementation of the adjustment program during 1985-86, the rescheduling of the country's external debt by its commercial creditors and continuation of their agreement on modest involuntary lending, Argentina's growth prospects for the rest of the decade would be reasonably good. Under these assumptions, the current account deficit of the balance of payments is projected to average about US$2.2 billion per year during 1985-86, equivalent to 2.5 percent of GDP, to be financed largely by increasing disbursements of existing and projected loans from private and public sources and with a modest amount of direct foreign investment. This should be sufficient to support an average growth of real GDP of 2.2 percent during 1985-86, led by an increased production and an expansion in exports of agriculture and industry. Beyond 1986, real GDP growth could resume at about 3.5 percent per year as a result of the expansion in exports and of increasing agricultural and industrial production. The current account deficit would also decline rapidly from 1987 on as a result of increasing export proceeds from grain and manufacturing exports. Thus, the current account deficit of the balance of payments is projected to amount to only US$0.5 billion by 1990, equivalent to 0.4 percent of GDP. Debt Service and Creditworthiness 1g. At the end of 1983, the total public sector external debt of Argentina was US$33.2 billion. From US$12.5 billion at the end of 1978, it had grown almost three-fold. The structure of the debt also had changed radically during the 1978-1980 period. At the end of 1978, the debt to commercial banks constituted 38 percent of the total, but this ratio rose to 60 percent by the end of 1980, and 84 percent by the end of 1983. Total debt, including private, was US$46 billion at the end of 1983. Total debt service requirements were 79 percent of exports in 1983. The external trade surplus, although large, could not meet fully this obligation resulting in interest arrears of US$1.2 billion by the end of 1983. Following the agreements with the Fund and its commercial creditors, Argentina initiated a program to eliminate payment arrears. The commercial banks completed the subscription to the US$4.2 billion of fresh money in late April 1985. Pending the revision of the targets of the IMF agreement, the banks are expected to release the first tranche of their additional financing. This should enable Argentina to resume the payment of arrears. Total external debt is projected to reach US$58 billion by the end of 1990. However, as a percent of GDP the debt is projected to fall to 44 percent in 1990 from 65 percent in 1983. The debt service ratio is projected to decline to 63 percent in 1990, with the trade surplus covering 94 percent of projected interest payments. Provided that the arrears are eliminated by the end of March 1986, as the current program calls for, and that the debt amortization payments due in 1986 are restructured with a modest increase in the commercial banks' exposure, Argentina should be able to meet the servicing requirements of its external debt, including new borrowing for high-yielding  projects which would support increased foreign exchange generation, efficient import substitution and increased domestic resource mobilization. At the end of 1983 the Bank's share of Argentina's total debt outstanding and disbursed was 1.6 percent and its share of external debt service payments was 1.1 percent. PART II - BARK GROUP OPERATIONS IN ARGENTINA Bank Operations 20. Past Bank lending to Argentina has been sporadic because of periodic macroeconomic and sectoral difficulties. In the period 1980-84, the Bank made loans for eight projects amounting to US$805 million. Since July 1983, no new operations have been presented because of the drastic deterioration in Argentina's economic situation and the uncertain state of ecor-omic management. 21. Bank lending since 1980 has focused on major infrastructure projects and the provision of credit for the development of the industrial and hydrocarbon sectors. The Yacyreta Hydroelectric Project is intended to channel the enormous potential of the Parana River to provide base-load electric energy for Argentina in the 1990's. The Second Industrial Credit project supports the modernization and expansion of export-oriented industries. A highway sector project is helping to augment and maintain the road network. In parallel with these projects, the Bank has suppoz4ted Government efforts to exploit Argentina's energy resources; for this purpose four loans were approved during this period: an engineering loan, to help Argentina assess its hydrocarbon reserves; a Coal Exploration loaL, to i.mprove the basis for rational exploitation of coal resources; a line of credit to the National Development Bank, to facilitate private sector participation in exploration and production of oil and gas; and a Refinery Conversion loan, to alter the country's two major refineries so as to meet changing demand patterns for petroleum products. In the process, the Bank has assisted the Government in gathering and interpreting the infcrmation required to design a primary energy use strategy that would reflect t'. relative prices of energy sources and take into account the link between oil and gas production. Following on previous work in developing a long-term power expansion program, a Gas Optimization study identified policy options for the greater use of natural gas vis-a-vis oil. Ways to save energy in the industrial sector are being studied, and price adjustments in retail petroleum products have been encouraged so as to assure the economic use of hydrocarbon products. 22. Execution of Bank-assisted projects in Argentina has suffered in recent years from policy reversals and cumbersome bureaucratic procedures, as well as from curbs on public investments stemming from the need for fiscal austerity and from the private sector's reluctance to invest in an uncertain environment. The authorities share the Bank's concern about this situation, which has resulted in unexpectedly slow disbursements and consequent negative resource transfers. In response, several existing projects have been restructured to improve their execution. The Bank also has instituted procedures for monitoring monthly disbursements and for periodic project implementation reviews. Disbursements of Bank loans in 1985 have been more than double the rate in 1984.  23. The promising prospects for political stability and serious efforts of the new Government to tackle Argentina's thorny economic problems provide the Bank with an opportunity to play a key role in the country's economic recovery and future development. The Government has requeated the Bank's help in implementing a stabilisation program and in preparing the way for renewed long-term economic growth. Over the short-term, the Government is seeking help with economic analyses and expanded lending operatione designed to enhance domestic resource mobilization and increase the availability of foreign exchange. Economic sector work already under way includes a major public sector investment review and comprehensive export-oriented agricultural and industrial studies. The Bank is also supervising a UNDP-financed project to prepare a technical assistance loan for reforming public sector management. These activities are expected to lead to subsequent Bank assistance in strengthening the international competitiveness of the economy and making the public sector more efficient. The proposed loan would help Argentina expand its capacity to make effective use of its hydrocarbon resources and to increase utilization of natural gas and its by-products. The Bank is reviewing the appraisal of the proposed Bahia Blanca Port project, which would reduce shipping costs for grain exports, along with a proposed agricultural sector project linked to the elimination of agriculture export taxes. A water supply and sewerage project under consideration would help improve sector finances and develop provincial agencies. Further support for the power sector, directed at distribution and transmission requirements, is also being studied. IFC Operations 24. IFC has made 25 investments in Argentina, totalling US$236 million, of which US$121 million has been repaid, cancelled or sold. A summary of its investments is shown in Annex II. Promotional efforts are geared to export or import substitution-oriented projects with emphasis on oil, petro- chemicals, and i,lated sectors. IFC will also continue to seek investments in projects where its presence would facilitate the formation of joint ventures with foreign participation, and act as a catalyst to attract higher levels of commercial financing. PART III - THE OIL AND GAS SECTOR 25. Argentina has a substantial and diversified energy base. The exploitable hydro-electric power potential over 25 years is estimated at 1,430 million tons of oil equivalent (MNTOE); the proven and potential reserves of gas amount to 2,080 MMTOE and of oil, 1,093 MMTOE. The country also has uranium and low-quality coal deposits as well as some potential for vegetable fuels, geothermal, wind and solar energy. Argentina has been self-sufficient in energy since 1981, largely because of falling demand during the economic recession, but energy resources and demand are not balanced. Hydroelectric power, representing over half of energy resources, supplies only about 9 percen'. of domestic energy demand. Likewise, natural gas meets somewhat less than one-third of demand, but has the potential for a substantially larger share. Conversely, crude oil, whose proven reserves account for only 12 percent of total resources, meets 56 percent of demand.  - 8 - 26. Accordingly, the Government intends to shift energy demand and supply away from oil, and toward reliance on hydroelectric power and natural gas. Efforts in this direction have already begun to alter the pattern of energy production and consumption. Natural gas has replaced fuel oil in industry and electricity generation, increasing its share of final energy consumption f..m 15 percent in 1970 to about 33 percent in 1983. Meanwhile, the shares of electricity increased from 8.5 to 12 percent, fuel oil fell from almost 20 percent to less than 8 percent, and other petroleum products decreased by about 2 percent. 27. Past exploration and development investment by both the private and public sectors have been sufficient to permit Argentina to replace yearly consumption of crude oil with new discoveries. As a result, oil reserves have remained essentially constant over the past 15 years, even though rising consumption has reduced the ratio of reserves to annual production from 16:1 to 14:1. Gas reserves have increased, however, from approximately 7 to 25 trillion cubic feet principally as a result of several important new discoveries. Despite substantial increases in consumption, known gas reserves would be sufficient to meet demand for over 45 years at current production rates. However, substantial gas resources, 3 billion cubic meters in 1983, were wasted by flaring. Approximately 35 percent of this volume, equivalent to 5 percent of total primary energy production, was flared because of lack of gathering and compression facilities; this gas could have been economically recovered with more adequate infrastructure. 28. Because the production cost of gas, which is mostly associated with oil, is extremely low at the wellhead, the substitution of gas for liquid fuels has been actively promoted, and a 10,000 km network of gas trunk lines has been built. This network now operates at its design capacity of 44 million cubic meters per day, and can no longer meet demand. Limitations in system capacity in turn constra-.n further substitution of natural gas for higher-cost petroleum products. Gas could economically replace a greater volume of fuel oil, which still accounts for approximately 18 percent of industrial energy consumption (largely because utilities and industrial users of gas must switch to fuel oil during the peak winter months). Gas could also replace liquid petrol:um gas (LPG), kerosene and fuel oil which together account for one-third of residential energy consumption. Compressed natural gas (CNG) could replace gasoline and diesel in transport. Also, natural gas-fired plants compare favorably with other types of power plants and their share of electricity generation could be increased from the present 35 percent, displacing other fuels and more capital-intensive hydroelectric projects. The Government intends to remedy the situation by improving gas transmission infrastructure and facilities and has requested Bank help for this purpose. In addition to aiming at meeting existing and potential domestic demand for natural gas, the Government is now considering gas exports to Chile, Brazil, Uruguay and Paraguay. Recent discussions with the Brazilian and Chilean authorities suggest progress in integrating the use of gas on a regional basis. Export projects based on methanol and liquified natural gas have also been considered but appear less likely because of their large capital requirements and limited international market demand.  -9- Development Strategy 29. Argentina's main objective in the oil and gas subsector is to maintain the current self-sufficieLcy by promoting the more efficient use of available energy sources, and by further developing domeatic oil resources. Without a major effort to reverse the declining trend of the reservos-to- production ratio for crude oil, the country could easily revert to the status of a net oil importer, especially when energy demand again increases with economic recovery. To avoid this, current Government rolicies aim at: (a) encouraging the exploration and development of new hydrocarbon reserves by both private and public sectors; (b) encouraging further substitution of natural gas for liquid fuels, and correspondingly adapting refinery yields to changing demand patterns (i.e. reducing the production of fuel oil); and (c) adjusting the prices of petroleum products and gas so as to enhance their rational economic utilization, promote energy conservation, and ensure the financial viability and investment capacity of public and private enterprises in the sector. Institutional Setting 30. Energy Secretariat. The EnergF Secretariat in the Ministry of Public Works is responsible for the establishment and implementation of the Government's energy policies. In the past, the absence of an overall energy development plan and frequent changes in the administration have caused energy policies to be implemented erratically. To remedy this situation, the present Government created a Planning Subsecretariat whose main task was to prepare a national energy plan. One of the priority tasks of the Subsecretariat is to ensure that the investment plans of the sector enterprises are integrated into a comprehensive nationwide energy strategy. The proposed project provides for technical assistance to the Planning Subsecretariat for this purpose. 31. In addition to energy planning and policy development, the Energy Secretariat is directly responsible for overseeing the activities of the public enterprises operating in the sector. In the oil and gas subsector, the Subsecretariat of Fuels oversees: (a) Yacimientos Petroliferos Fiscales (YPP), the national oil company which produces crude oil and natural gas, and refines and distributes petroleum products; (b) Gas del Estado (GdE), the gas utility, which purchases natural gas from YPF and transmits and distributes gas to final users; and (c) Yacimientos Carboniferos Fiscales (YCF), which operates the southern coal mines. The Secretariat is also responsible for overseeing the activities of private companies in the energy sector. These include the holders of a few petroleum exploitation concessions granted directly by the Government to private comparnies before 1958; the companies exploring and developing hydrocarbon resources under contract with YPF, which account for the vast majority of privately produced oil in Argentina; and the owners of private refineries and the Center-West natural gas pipeline. YB? 32. The state-owned Yacimientos Petroliferos Fiscales (YPF), which began exploration and production of crude and natural gas in 1907, operates  - 10 - in virtually every branch of the petroleum and natural gas seotor excep, for the marketing of natural and liquefied petroleum gas. It is ttie largest single enterprise in Argentina, as well as one of the largest oi' companies in Latin America. The taxes it collects and pays typically prov4.1e approximately 15 percent of Government revenue. YPF is directed by a nine member Board, all appointed by the Government for three-year teems and eligible for reappointment. Total employment fell from 51,700 in 1976 to 32,800 by end-1983, partly reflecting the sale of the company's retail ..ervice station network to private owners. 33. YPF accounts for approximately 70 percent of Argentina's output of crude oil and 60 percent of development drilling. YPF also operates 4,600 km of crude oil and petroleum products pipeline, a fleet of tankers, and six refineries which account for 65 percent of installed refining capacity. The two principal refineries are being modernized with Bank assistance to raise their conversion capacity and increase the share of lighter distillates vis-a-vis heavy fuel. 34. Lack of foreign exchange has impaired YPF's ability to finance essential imports and has required the use of makeshift substitutes with some loss of efficiency. Similarly, financial constraints have forced the company to cut all but its most essential expenditures. Despite these constraints, YPF, together with the private sector, has been able to add new reserves each year approximately equal to production. 35. Most of YPF's investments have been traditionally allocated to hydrocarbon exploration and development (US$710 million or 87 percent of YPF's total investment in 1983). These expenditures have maintained a reasonable balan:e between new exploration (especially in relatively well-known basins, where the success ratio is high) and development and maintenance of producing fields. The balance of YPF's present investments consists largely of the completion of the Bank-supported Refinery project. 36. YPF's principal aims are: (a) to ensure the continuation of an adequate level of exploration and development drilling at least until the private sector responds to the new incentives offered by the Government (described in paras. 44-45); (b) to increase gas substitution by altering the composition of refineries' output and making more natural ga. available, mainly by reducing the amount of flaring of associated gas through better reservoir management (which the proposed project addresses); and (c) to promote energy self-sufficiency by investigating enhanced oil recovery methods unlikely to be pursued by private investors (another goal addressed by the proposed project). 37. While YPF's investment program appears basically sound and appropriate, it reflects a relatively short-term approach rather than a consistent, long-term investment strategy. The technical assistance component of the proposed project would include provisions for improving YPF's investment planning, especially for optimizing the production of both gas and oil. In addition, at negotiations, assurances were obtained that  - 11 - YPF, together with the Government, would periodically review with the Bank YPI's investment program and financial plan for the mubsequent three years (Section 3.04 of the draft Loan Agreement). 38. Finanoes. Since 1980, the company's financial situation has been very seriously tamaged by a combination of lover real prices, higher taxes, high foreign borrowings incurred on behalf of the Government, and rapid peso devaluations. As a result, YPF's US$2.3 billion equivalent net worth at end-1980 deteriorated to a negative US$1.1 billion equivalent at end 1982. The company has not met the financial covenants agreed under the Refinery Loan. In order to reestablish YPF's financial integrity, the Government is committed to contributs the equivalent of US$3.3 billion to YPF's equity by meeting this amount of its foreign debt service obligations; and to increase YPF's earning power by allowing net-of-tax prices to increase more rapidly than excise taxes on products. Implementation of these measures is further discussed in Part IV (paras. 63-64). 39. Financial Management. The Refinery project includes technical assistance to modernize YPF's planning, budgeting, cost accounting, management information and inventory control, mainly in the area of refinery operations. YPF has asked, and the Bank has agreed, that the scope of this assistance be widened to cover planning and financial management throughout the company. This assistance will extend the introduction of financial controls over a broad range of activities, as well as provide automated systems to monitor investment outlays and operating expenses. The proposed project would also provide technical assistance to strengthen the management structure and organization of the company to allow for quicker and more efficient decision-making; enhance its investment planning; and improve selected aspects of technical and commercial operations and telecommunications systems. 40. Pricing. Over the past few years, different administrations have applied inconsistent policies to petroleum products, ranging from sharp increases to deliberate delays in needed price adjustments (and consequent deterioration of real prices) in efforts to curb inflation. The present Government has made major progress in raising petroleum product retail prices, in terms both of their absolute level and the relative pricing of various energy products at different stages from production to consumption. However, most of the proceeds went to the coffers of the Treasury. At present, the retail price of gasoline in Argentina is significantly above international levels; prices for middle distillates (diesel) are comparable to international values; and heavy distillates (fuel oil) prices are slightly below comparable FOB values. 41. The Government announced in February 1985 that it intended to raise the prices of diesel and other middle, and fuel oil and heavy distillates by 2 percent per month on average in real terms over an 18-month period relative to regular gasoline prices. This would eliminate the implicit subsidy on fuel oil, by increasing its price to international levels; and raise diesel prices relative to the price of regular gasoline. The result would be a more balan_ed interfuel pricing structure. The Government has been implementing  - 12 - the new policy. Assurances were obtained during negotiations that the Government would continue price adjustments designed to bring (a) diesel to 53 percent and 70 percent of the prices of gasoline by September 30, 1986 and January 1, 1988, respectively; and (b) fuel oil to 33 percent and 40 percent of gasoline prices by the same dates (Section 4.03 of the draft Guarantee Agreement). 42. The economic cost of gas in Argentina corresponds to the long run marginal cost of transmission because excess gas is expected to be produced in the coming decades and itB production cost is extremely low at the wellhead. While the consumer price of gas (US$1.57/MCF) is set at about its production cost (US$1.10-1.40/MCF), GdE purchases gas from YPF for approximately US$0.78 per MCF and for approximately US$4.50 per MCF from Bolivia, resulting in an average cost of approximately US$1.40/MCF. The Government has indicated its willingness to compensate GdE for the higher purchase price, as well as to assume a substantial part of GdE's dollar- denominated debt. In order to ensure its financial viability and make a reasonable contribution to investment, GdE would have to sell gas at about US$2.50/NCF. The Government is planning on increasing the price of gas to consumers to US$1.70/MCF and to industrial users (from US$1.71/NCF) to US$1.88/NCF, both by January 1, 1986. These and other measures will improve GdE's finances while still keeping natural gas competitive with fuel oil, and will preserve strong incentives for conversion to gas use. The IDB is presently discussing these issues with the Government in connection with a proposed loan for the expansion of the Northern Gas Transmission Pipeline. The Bank w-ll review gas pricing and GdE's financial viability in conjunction with a planned future operation with GdE. 43. Role of the Private Sector. The private sector has played an active role in Argentinars petroleum exploration and development efforts since 1916. Private companies have typically produced about a third of the country's total output. About 50 local private oil companies, together with several foreign ones, are engaged in 30 production contracts in known fields and 15 risk contracts for the exploration of new areas; YPF awards these contracts through international competitive bidding. 44. As a result of repeated devaluations since 1980, the US dollar equivalent value of payments to contractors under many of the contracts has fallen much more rapidly than international crude prices. By mid-1983, production fees to some contractors were estimated to be below their lifting costs. Many contractors stopped new investment and production fell. In June 1983, the former administration established new terms for most production contracts and for several risk (exploration) contracts, raising the reference prices of crude oil and unifying the mechanism for calculating fees. The present Government confirmed these changes last autumn. The new provisions, which had the effect of doubling average 1982 prices, satisfy the contractors and are comparable to those in other countries. 45. The Government also has recently taken other initiatives to encourage private investment in oil and gas exploration offshore. For example, it proposes to offer contractors annually opportunities to bid on new exploration areas, with contract conditions reflecting the extent of exploration risk. It will also permit joint ventures, among other new forms  - 13 - of association, and will allow "seismic options" which would enable contractors to review the potential of the areas considered before comMitting drilling expenditures. This should provide an additional incentive to companies to explore in high-risk areas. In another departure from past practice, the Government has offered that payments to contractors for oil produced be made in products which could be exported; this vould provide essential assurances to investors regarding foreign exchange revenues. These measures are likely to promote new private sector investment, and should thus help to accelerate disbursements under the Bank's USS100 million Oil and Gas Credit. 46. In the early 1980s, a consortium of private (mainly foreign) companies built the 1,500 km Center-West pipeline and gas treatment system which it now owns and operates under a service contract that is unique in developing countries. A dispute has arisen between Argentina and the contractors over technical and related contractual differences, mainly regarding the operations of a gas treatment plant. Negotiations for the settlement of this dispute and the arrears in the Government's payment of transmission fees are underway. At the request of the Governments of Argentina and the Netherlande, the Bank is providing technical assistance to the parties for resolving some of the remaining issues; this should expedite settlement of the dispute and thus further improve the climate for private investment. 47. Experience with Past Lending. The proposed project would serve as a basis for continuing the Bank's energy policy dialogue with the Argentine authorities, particularly concerning sector planning and investment priorities; rationalization of petroleum product pricing; gas utilization; and the contributions of the public and private sector companies. The Bank's three loans to Argentina's oil and gas sector have totalled US$327 million, and have been assigned to support the integrated development of Argentina's energy resources. They have also helped the Government and a number of public enterprises to gather and interpret the data required to design an appropriate mix of primary energy utilization--one that would reflect the relative economic price of both fossil energy sources and hydroelectric power, and that would take into account the link between oil and gas production. So far, the Bank has been concerned with resource assessment and energy sector planning under the Oil and Gas Engineering Project (Loan 1880-AR); conversion of low-value fuel oil into higher-value products under the Refinery Project (Loan 2032-AR); and appropriate incentives to private sector companies under the Oil and Gas Credit (Loan 2031-AR). These projects have proceeded satisfactorily, notwithstanding some delays and financial difficulties, most of which have been associated with the severe recession and economic uncertainties in Argentina. 48. Through this involvement, the Bank has suppcrted important policy decisions in the oil and gas sector over recent years. These relate to revisions of contractual arrangements between YPF and private companies for oil and gas exploration and development, and the restoration of average petroleum prices to economic levels after their erosion in 1982. The Bank also participated in discussions leading to the Government's capital support commitment to YPF, which is the basis of the company's financial recovery plan.  - 14 - 49. The proposed project is part of a major effort to rationalize the use of, and further develop, Argentina's domestic hydrocarbon resources and addresses these issues. It includes priority investmento identified by the Gas Optimization study needed to meet domestic gas demand and prepares the ground for further gas substitution and potential exports. Furthermore, the proposed loan is designed to support efforts by YPF to promote a better balance between liquids and gas production in the development of the sector, and establishes the basis for annmual reviews of the sector investment program with the Government. It addresses the issue of interfuel pricing and the distribution of the proceeds of petroleum product sales. Its technical assistance components would strengthen YPF's accounting, evaluation, and control system, which should help to increase the company's efficiency and cost effectiveness. PART IV - THE PROJECT 50. The project was initially formulated by YPF during 1982 as an oil exploration and development operation. It was delayed by uncertainties about energy policies associated with the change in Government after the November 1983 elections and was later modified in the light of revisions in the Bank's lending policy towards the hydrocarbon sector. The new project, oriented to gas development, was appraised in November-December 1984. Negotiations were held in Washington from May 15 to 17, 1985. The Government delegation was headed by Ing. Jorge Lapena, Subsecretary of Planning, Energy Secretariat. A Staff Appraisal Report entitled "ARGENTINA - Gas Utilization and Technical Assistance' Project (No. 5035-AR dated May 24, 1985) is being distributed separately to the Executive Directors. Special conditions of the Project are listed in Section III of Annex III. Objectives and Approach 51. The proposed project would help YPF undertake priority investments in gas field development, expansion of the northern transmission system, augmenting the use of gas, and producing high value liquid hydrocarbons from natural gas, for which no alternative sources of foreign exchange financing are available. The project also includes operations designed to introduce new technology for increasing the total amount of oil recoverable from known fields and to improve the transportation of petroleum and petroleum products. 52. The project components would include: (a) Expansion of liquid recovery facilities at Campo Duran as part of an increase in the capacity of the Northern Gas Pipeline system; (b) Gas debottlenecking projects (new compression facilities, liquid separation operations, gathering lines); (c) Enhanced oil recovery pilot projects; (d) Two pipelines for the transportation of crude and refinery products;  - 15 - (e) An initial group of refilling stations for the beginning of a pilot program of CNG use for vehicles; and (f) Technical assistance to YPP for improving its financial control systems, management structure, investment planning and selected operations, and to the Energy Secretariat for energy planning. 53. Campo Duran. The expansion of the liquid recovery system at Campo Duran is an important part of an integrated plan to expand gas delivery from fields in the north and in Bolivia to Buenos Aires and other high-demand areas along Argentina's main industrial corridor. Gas del Estado is now negotiating a loan with the IDB to expand the capacity of the pipeline. YPF has included provisions in its 1985 budget and made contractual arrangements for private operators to assist in the development of the fields which would supply gas to the system. In conjunction with this expansion of capacity, the proposed project would finance the enlargement of the existing gas processing plant at Campo Duran, raising its capacity from 250 MNCFD to 575 MMCFD. This component comprises:(a) installation of a new liquid recovery plant; (b) construction of new oil and gas gathering lines; and (c) installation of new compressors to reinject excess gas in the summer. The Campo Duran topping plant would separate significant volumes of propane, butane, and natural gasoline for export. The greater volume of gas produced would permit production of approximately 4,500 barrels a day of additional condensate oil. Disbursement of funds for this component would be contingent upon the completion of satisfactory financing arrangements for the pipeline capacity expansion (Schedule 1, para. 3(b) of the draft Loan Agreement). YPF would establish a project unit to carry oat this activity, and would employ consulting process engineers to design and warrant performance of the liquid recovery plant. The engineers' recommendations would be approved by the Bank before tender documents were issued. 54. Gas Production Debottlenecking. YPF has identified and prepared a number of relatively inexpensive but high priority projects to remove bottlenecks which prevent it from obtaining optimum joint production or use of oil and gas from existing fields, as well as to eliminate transmission constraints in the system. These include (a) installation of compression facilities to reinject gas during off-peak seasons, permitting increased oil production; (b) facilities to separate liquids from natural gas streams before injection of the latter in transmission pipelines; and (c) gathering lines and compressors to collect gas now being flared. The project would include financing for several of these activities which were among those identified by the Gas Optimization Study. Those selected for financing would have to be justified by an economic rate of return of at least 15 percent and would not individually exceed US$10 million of loan financing (Schedule 5, para. 2 of the draft Loan Agreement). 55. Lujan de Cuyo Pipelines. YPF plans to construct a crwde supply pipeline to the Lujan de Cuyo refinery from neighboring fields (present supply arrangements are by rail and truck) and to increase the capacity of a product pipeline from Lujan de Cuyo to the Greater Buenos Aires area. The additional capability to process heavier liquids will facilitate disposal and utilization of fuels substituted for by natural gas and is consistent with integrated improvement in Argentina's production, processing, refining and consumption system. Lack of foreign exchange has prevented this work, which  - 16 - is important for the successful completion of the Refinery Project (scheduled to begin coming onstream in 1987). 56. Enhanced Oil Recovery. An increasing share of YPF's future planned production is expected to come from enhanced oil recovery projects, as existing fields are being pressed to their limits from primary production. The average rate of oil recovery is relatively low (17 percent), offering considerable opportunities for recovering large reserves by secondary or tertiary methods. YPF has identified ten fields as candidates for pilot enhanced oil recovery proiects. With the help of consultants, YPF would undertake feasibility studies of each of the fields. For those adequately justified, YPF would proceed with specialized studies of core samples and reservoir characteristics, followed by laboratory simulation studies. Projects financed under the loan be limited to those cases in which production costs based on field-wide application would not exceed import costs for comparable crude petroleum (Schedule 5, para. 1 of the draft Loan Agreement). Individual project funding would not exceed US$10 million. 57. CNG. Transportation accounts for one-third of total energy consumed in Argentina and 60% of petroleum consumption; and over 40% of the nation's vehicle fleet are in the capital city (70% in Greater Buenos Aires Province). Given the abundance of natural gas, the Government has decided to proceed with the use of CNG for transport on a pilot basis. If the pilot project is successful, the Government's objective would be to convert about 3 percent of the total fleet, some 135,000 vehicles, over tLe next 10 years, a goal that is considered feasible based on experience elsewhere. If implemented at this level, CNG would substitute for approximately five million barrels per year of gasoline and diesel. 58. The technology for vehicle conversion and filling stations is well established ana is available from several manufacturers of different countries. Over 350,000 converted vehicles are driven in Italy, and the system has been installed in Canada, New Zealand, and the U.S. The safety record of the system is excellent. A successful CNG conversion program depends on: (a) adequate price differentials between CNG and gasoline and automotive diesel; (b) the reliability and availability of equipment and spare parts for conversion kits and refilling stations; and (c) an adequate distribution network for refueling. The Government has already decided to set the retail price of CNG at 45 percent of the corresponding price of gasoline. This would stimulate conversion from gasoline and assure adequate profit margins for refilling station operators. 59. The proposed loan would finance imported components for an initial pilot group of approximately 20 stations and the services of consultants experienced in establishing sugh networks. The consultants would help YPF to define the pilot program for implementing the conversion system, which would be jointly reviewed before initial disbursement of funds for the CNG activity (Schedule 1, para. 3(d) of the draft Loan Agreement). The Bank would participate in a steering committee representing both the public and private sectors, YPF, and the consultants, meeting regularly to review the results of the execution of the program. Gas del Estado will exercise quality control and monitor compliance with safety standards (Schedule 5, para. 3 of draft Loan Agreement). Loan conditions include the Government's commitments to ensure the maintenance of adequate relative pricing of CNG and  - 17 - liquid fuels, as well as appropriate incentives to facilitate the acquisition of conversion kits (Sections 4.04 and 4.09(a) of the draft Guarantee Agreement). Assurances were obtained during negotiations that the Government would provide appropriate incentives to encourage private ownership and operation of all refilling stations deriving from the execution of the pilot program (Section 4.09(b) of the draft Guarantee Agreement). 60. Technical Assistance. US$2 million would be allocated for support for the Energy Secretariat. This would finance consultant services focused on the optimization of the development of the oil and gas sector, and defining a strategy to balance private and public enterprise investments in the sector. The work program was discussed during negotiations; itu final version would be presented to the Bank by December 31, 1985 (Section 3.06(a) of draft Guarantee Agreement). The other institution-building segment of the proposed loan concerns several proposed improvements to YPF's administrative and financial management referred to in para. 39. These encompass: (a) review of YPF's organization and management structure; (b) review of YPF's accounting, budgeting, financial control and management information systems and installation of improvements; (c) review of automated and centralized control systems for field operations, including implementation of systems; (d) review of YPF's investment planning and programming; (e) review of selected technical and commercial operations (including exports merchandising); and (f) training. Timetables for each area have been established; consultants will be contracted prior to December 31, 1985 (Section 3.02(b) of the draft Loan Agreement). 61. Costs and Financing. The proposed US$180 million Bank loan would finance 21 percent of the total cost of the project 'including contin- gencies). The Bank, however, would not participate in financing the expansion of the capacity of the Northern Pipeline or the related field development, which IDB, YPF and "&s del Estado together with private companies would handle. The proposed loan would finance 100 percent of the estimated foreign exchange costs of the remaining project components over the period 1985-89. Because of YPF's financial circumstances, as well as Argentina's arrangements with its commercial creditors for servicing its external payments, YPF is not currently in a position to arrange external commercial financing for the project. Therefore, the proposed loan includes US$18.9 million to finance interest due on the Bank loan during the construction period; this will help to reduce the heavy financial pressures on YPF. Peso funds required to finance the balance of project costs are expected to be generated from ongoing YPF operations. The cost estimates (calculated in December 1984 prices) include a physical contingency of 10 percent, and price escalations of 5 percent for the remainder of 1985, 7.5 percent for 1986 and 8 percent for 1987-89. YPF's Finances 62. YPF's financial situation has been very seriously affected by Argentina's persistently high rates of inflation and the large differential between rates of domestic and international inflation and the value of the Argentine peso relative to the US dollar. The worst damage has been done by foreign exchange losses resulting from the fact that much of YPF's debt was being contracted in dollars, whereas the company's assets (and earnings) were in pesos. Adjustments to YPF's capital account necessary to reconcile the differential impact of monetary and inflation adjustments upon asset and  - 18 - liability accounts net of revaluations of assets--particularly during 1981-83--have been very large, making it difficult to undertake a meaningful financial analysis of the company's operations. Based on these adjustments, YPF sustained significant losses during 1984, as well as 1981 and 1982. 63. In order to reestablish YPF's earning power and financial integrity, it will be necessary to increase the company's income by raising net prices after fuel excise taxes and other taxes and also to recapitalize the company. There have already been significant adjustments in retail petroleum product prices: gasoline and fuel prices, for example, have doubled in dollar terms since end-1982, and diesel prices have risen by 60 percent. Taxes have also been raised, however, and net of tax revenues remain insufficient to meet YPF's cash needs. In addition to the commitments regarding increased prices of middle and hsavy distillates (para. 41), assurances were obtained during negotiations that the revenues YPF receives (net of taxes and royalties) and after financial costs are adequate to earn YPF at least a 6 percent rate of return on revalued net fixed assets (Section 4.01 of the draft Guarantee Agreement). Recapitalization would be achieved through the Government's debt support measures (ref. para. 38). Through legislation passed in November 1983, the Goverament made a formal commitment to meet much of YPF's payment obligations on foreign debt. This commitment is equivalent to an equity contribution. A Presidential Decree to implement this commitment has been signed by the Ninister of Public Works. The President's signature constitute a condition of effectiveness of the proposed loan (Section 7.01 (d) of the draft Loan Agreement). The contribution by the Government, together with the price increases and measures committed for the future, will simultaneously increase YPF's net worth and reduce the burden of debt service payments on the company's cash flow. 64. Given the aforementioned measures, financial projections prepared by the Bank indicate that YPF would be able to move progressively towards compliance with its commitments under the Refinery Loan covenants. The projections show that YPF would be able to meet the covenanted minimum debt service 1.4:1 ratio from 1985 on. The covenanted quick ratio of 0.6:1 would also be met from 1985. The 60:40 debt:equity ratio, the most difficult criterion in view of YPF's present negative net worth, would be met by 1989. During negotiations, the Government and YPF representatives agreed to commit YPF to these financial targets. Further, YPF would make no cash distribution which would reduce the quick ratio below 0.8:1 (Section 5.03 of the draft Loan Agreement). 65. Loan Administration. YPF would administer the project (except for the technical assistance to the Energy Secretariat) with the services of consulting engineers for the Campo Duran liquid recovery plant, an experienced CNG operator and consultants for the enhanced recovery operations. Detailed justification of each enhanced recovery and gas debottlenecking subproject proposed for Bank financing would be reviewed and approved by the Bank prior to loan disbursement. For the energy planning component, YPF would transfer to the Energy Secretariat the funds allocated for this purpose; and financing for the individual studies agreed to as part of the work plan for this component would be approved on a case-by-case basis.  - 19 - Procurement and D4sbursement 66. The proposed loan would finance (a) equipment, spare parts and materials to be procured for the liquid recovery plant and associated facilities for reinjection at Campo Duran, subprojects for debottlenecking and enhanced recovery, the two pipelines and CNG refilling stations; and (b) consultant services for the YPF's financial management program, the enhanced recovery pilot projects and for the Energy Secretariat planning component. YPT plans to employ, prior to Board Presentation, process engineers who will determine the detailed design of the liquid recovery plant. The contract for this work will be awarded on the basis of procedures consistent with Bank guidelines. It is recommended that retroactive financing be permitted for this purpose, subject to an aggregate maximum of US$1 million. Goods and services eligible for financing will be procured under ICB procedures satisfactory to the Bank (ref Annex IV). The liquid recovery plant will be procured under a turnkey contract after prequalification, on the basis of tender documents prepared by the process consultants referred to above, which will be subject to the Bank's prior review and approval. Construction of the two pipelines will be subject to ICB. Bid packages for goods costing less than US$500,000 or for goods available from only a limited number of suppliers, such as equipment for the CNG component, will be procured under limited international bidding, involving at least four qualified suppliers from three different countries, pursuant to the Bank guidelines. Goods estimated to cost less than US$500,000, not exceeding in total US$10 million, will be procured under local competitive bidding, in accordance with procedures satisfactory to the Bank. The loan is expected to be disbursed within four years. Project Benefits and Risks 67. It is estimated that the execution of the Campo Duran component will result in increased production of 165,000 tons/yr of LPG and 74,000 cubic meters/yr of natural gasoline; and will eliminate the flaring of 100 NMCFD of excess gas. The economic analysis indicated an ERR of 22 percent. If, as planned, the ethane recovery unit included in the project is installed (pending a more detailed market assessment), 270,000 tpy of ethane would also be produced. If so, and without considering the benefits of field development and the pipeline expansion, the ERR would be 30 percent. The economic return on the two pipelines is estimated at 30 percent. The economic return on the CNG component is estimated at 50 percent (over a 10-year period), reflecting the replacement of higher-value liquid fuels by lower cost natural gas. A preliminary evaluation of several candidate gas debottlenecking projects has produced ERRs exceeding 80 percent. Because of its experimental nature, no economic return was estimated for the enhanced recovery program; it has, however, been estimated that YPF may be able to raise its average oil recovery rate from 17 percent to up to 30 percent while still producing at costs less than import equivalents. Pilot projects would be undertaken on a least-cost basis. 68. The Campo Duran and CNG components of the project would generate substantial foreign exchange savings estimated at some US$375 million, by averting the cost of crude imports which, in their absence, would likely have to compensate for any production shortfall. The project would also provide imnortant unquantifiable technical and institutional benefits, helping YPF to  - 20 - increase the efficiency of its operations and the Secretariat of Energy to strengthen its policy and planning capability. 69. The project involves minimal ecological disruptions. The technical risks of the project are moderate in view of YPF's established record in successfully managing large scale exploration and production programs. The adequacy of oil and gas reserves upon which the Northern Pipeline expansion is based has been confirmed by independent consultants. There is a risk of delay in the project because of difficulties in domeatic resource mobilization and/or securing external financing for the Northern Pipeline. However, the economic justification of the component would not be materially affected even if there were a one-year delay in its construction. The CNG technology is well known and the market estimates are considered conservative. YPY's management would be assisted by an experienced foreign firm and the project would be implemented with frequent reviews. Analysis of the prospective financial return to station operators indicates that there is an adequate margin both for sufficient returns to distributors and for appropriate revenue-raising taxes required by the Government. PART V - LEGAL INSTRUMENTS AND AUTHORITY 70. The draft Loan Agreement between the Bank and Yacimientos Petroliferos Fiscales, the draft Guarantee Agreement between the Argentine Republic and the Bank, and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement are being distributed to the Executive Directors separately. Special conditions of the proposed loan are listed in Section II of Annex III. 71. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 72. I recommend that the Executive Directors approve the proposed loan. A.W. Clausen President Attachm Ats June 3, 1985 Washington, D. C.  -21- ANNME I Page 1 of 5 IITNA - SOCIAL INDICATRM ATA SHT LACNIENA RZFREN GROUPS (JEIGWMD AVUAIS) /a N9UT (HOST 3tC10 MSTIA) h CUZIT KllDDLt UICIII KIDOUlolICOI 19i6.! 1970kLb- mw.i/Txb LAT. ASICA A cAR oUmip mu mama s. . MR) TOTAL 2766.9 2766.9 2166.9 AGRICULTURAL 1740.2 1777.0 1t18.0 Mrw cwin tsu) 700.0 1230.0 2520.0 2105.6 Z345.3 - aw . Mnac arnn (KILOGRAS OF OIL EQUIVAL.tirr 506.0 1211.0 1t45.0 995.5 1122.5 mOUAnom aD VITL 5STSICS POPULATION.NID-YRAR (TUASADS) 20C16.0 22962.0 28432.0 UltNU POPULATION (t o0 TOTAL) 73.6 78.4 83.3 66.5 46.5 POPULATION POECTIONS POPULATION IN YA 2000 (KILL) 36.1 STATIONARY POPULATION (HELL) 53.7 POPULATION IOENTtI 1.5 POPUIATION DENSITY PER SQ. ml. 7.5 6.7 10.2 33.7 S2.9 PER SQ. It. ACRI. LAND 11.8 l3.5 15.8 92.6 155.9 POPULATION ACE STRUCTURE (I) 0-14 YRS 30.1 29.1 27.9 39.9 31.6 15-64 YRS b3.7 63.7 63.7 56.0 61.1 b5 AND ABOVE 5.5 7.2 5.9 '.1 7.1 POPULATION GRWITH lATE il) TOTAL l.o 1.5 1.4 2.4 1.6 1U11A 3.0 2.1 1.9 3.6 3.7 CRUDE 31113 RATE (PER IIOUS) 23.u 22.9 2S.0 31.3 23.4 CRUDE DEAT3 RATE (PER TOUS1) 8.7 9.4 9.0 5.1 - 5. GROSS REPOODUCTIO RATE 1.5 1.5 1.3 2.0 1.6 FAMILY r.-'NtC ACCEPTOS*. AIUUtU l 'M ).S) USERS (Z OP MARRIED NWCiI. .. .. .. 4.3 FOODii AMI NUrMa INDEX OF FWD PROD. PER CAPITA (1969-71-100) 96.0 101.0 122.0 114.3 114.5 PEER CAPITA SUPPLY OF CALORIES CZ OF REQUIREMENTS) 126.0 L29.0 125.0 110.6 128.6 PROTEINS (CRtAS PER DAY) 107.0 106-0 107.0 67.3 89.7 OF VHt1CR MEDIAL AND PULSE 66.0 68.0 69.0 /c 34.1 34.5 OCILD (AGES 1-4) DEATH RATE 5.0 4.0 2.2 5.7 5.2 LIFE EXPECT. AT SIEN (EARS) 65.1 66.6 *9-. *4.7 67.4 IXFANT !WET. RAZE (PER DOUS; 6O.6 53.9 63.6 60.6 54 ACCESS TO SAFE 114WATEt C2P) TC-AL 47.3 56.0 73.0 65.4 UIRSAN 5B.9 09.0 .. 78.1 RISAL 9.o 12.0 .. 46_2 ACSS TO EFlETA DISPOSAL CZ OF POPULATION) TOTAL 62.0 85.0 77.0 5 : .9 UAb .. 87.0 .. 67.0 RA .. 79.0 .. 245 POPULATION PER PIIYSICIAN 7J0.C 5ZO.0 430.0 Ic 1917.7- 1065.8 POP. PER NURSINC PERSON 7$0.0 d 590.0 .. 815.8 764.1 POP. PER HOSPITAL BES TOTAL 1to00 ISO O 367-2 326.3 n334 190.0 /d 200.0 .. 411.5 201.5 RURAL "690.0 Id OLO.O *- 2636.3 ADIXSSIOIS PER NOSPITAL BED 2. .. .. 7.3 20.0 WCleIINZ AVERAGE SIZE OF NOOSE) L. TOTAL 3 3.3 .. .. URIN 3.3 .. .. - RUR2AL - 3 AVERAGE NO. OF PERSOSIIROIr TOTAL i. ;. - .. .. RURAL-'- ACCESS TO ELECT. t: OF DWELLINCS, rOL% 69.2 76.0 87.0 I:RI B4.:. RURAL 1a.- . .  ANNEX I -22- Page 2 of 5 AU;SNTIIA - SOCIAL IDIC DATA T AURGlUINA LZ1RRLJCR 0F00l a (WRlSlTE AYRAGER) f MOST (HOS U NNTCED SSTZAU l) /b LISOLt 1370t RECR MIDDLE INacUS ILCCW LOGOLb. 197d-b 0ESIDIATEb LAT. A512A4A CAR 1U501F ADJUUTZ ZUIOXLUUII RAtIOS PimnrtS TOTAL 9B.0 .106.0 119.0 105.4 101.1 MAUL 36.0 106.0 120.0 106.3 1053.5 136. 39.0 107.0 119.0 104.5 36.7 suCONDAI, TOTL 23.0 45.0 59.0 43.2 59.1 mu 23.0 42.0 54.0 42.3 65.9 73*. 24.0 44.0 63.0 44.5 50.6 VOCATIONIL (S O SZCONMAY) 30.3 55.4 61.3 33.6 21.6 lUflL'-UEACRER AImO YiRA 22.0 19.0 20.0 30.1 23.1 SECOIIDAL 7.0 7.0 16.8 20.5 ADLT LITERACY ATZ (1) 91.' 92.6 93.0 If 79.5 75.6 commmg PASSAa CuRS/ToUSaAN POP 23.0 60.1 .. 46.0 5S.7 ADIO REMITERS/TIOCSAND POP L69.8 375.6 375.7 If 225.6 164.9 TV REmEIERS/THOUSAJD POP 21.8 146.1 L14.2 101.2 123.8 5SPA51611 (-DALMY GIENUAL ZTrEZZSTf) OUZULTION PER THOUSAND POPULATOM 154.5 177.2 94.2 If 63.5 96.3 CINLEq 'NMAL AXTEDAICE/CAPIA 7.0 2.2 2. ;W 2.5 2.9 TOTAL LABO FORC CTICUS) 6L36.0 9299.0 11017.0 IDOL! (PERCENT) - & 24.7 26.7 23.2 34.5 AGRICULTRZ (PERCENT) 20.0 16.4 13.1 31.5 40.7 IN1SRtY (PE1CENT) 35.9 32.1 25.0 Z3.9 23.3 PARTICIPATION RATE (PERCENIT) TOT 39.5 38.8 38.7 32.2 42.9 MALE 61.0 58.1 57.1 49.3 54.7 mEKAL 17.2 19.3 20.6 15.2 31.0 ECOOMIC ECPSCNCr RATIO 0.9 0.9 0.3 1.4 0.9 Oim IS!RIRUTZUU PERCM OF ruIVATE INCME REEVD NY UiGES 5S OF BOlSELUS Z7.5 hiSS? 21m or BOUSUOLS 50.9 50.3 .. .. LOWEST 20S OF B tOSZUOLDS 6.9 4.4 LOVEST 40S OF WUSELDS 16.6 14.1 .. .. nozuzr ZAS eaorn E5n ant o sa LEVEL 0158 PER CAPITA) umaS .. .. .. Z6B_-2. RURA - -I- - .164.0 z rIXD XU7 OERnU LEM (US5 E CAPITA) URInE .. .. 653.0 A 522.9 SAL .. .. 577.0 1g 372.4 anA MrO. BLs ABLsE POVERTY SECtS LVE. (-I) OT AEILABLE N 0 T E 5 La Mm grap emragm far nub IMitAcor are papaUtim-aiubaed arithtic nun. Covargi at coutrie _ng the -inators dpeds on anabl