India - Oil India Limited (OIL) Petroleum Project

Damuwut af The World Bank FOR OFFICAL USE ONLY ATA'. '> -r/2 Report No. P-4451-IN MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT oF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN OF US$140 MILLION TO INDIA FOR THE OIL INDIA LIMITED (OIL) PETROLEUM PROJECT February 11, 1987 T his document has a restricted distribution and may be used by recipients only in the perfcrmance | of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY E QUJIVALEN TS Currency Unit = Rupee (Rs) US$ 1 a Rs 13.0 UNIT OF MEASURE DETRIC SYSTEM PRINCIPAL ABBREVIATIONS AND ACRONMS USED EOR - Enhanced Oil Recovery ERR - Economic Rate of Return 0OI - Govermnent of India bOC - International Oil Conpany OIL - Oil India Limited 1NGC - Oil and Natural Gas Commission FISCAL YEAR April 1 - March 31  FOR OFFICL U ONLY INDIA OIL INDIA LIMITED (OIL) PETROmEUM PROJECr LOAN AND PRDJECr SUMMARY Borrower: India, Acting by its President Beneficiary: Oil India Limited (OIL) Amoumt: US$140 million equivalent Terms: Standard Onlendinp Terms: Goverment to OIL for at most 15 years including 5 years grace at an interest rate of not less than 15%. The Government would bear the foreign exxhange and the interest rate risks. Financing Plan: OIL $384 million IBRD $140 million Cofinancing $ 60 million TOrAL $584 million Economic Rate of Return: 95Z for the production improvenent schemes; 47% for the gas re-injection component. Staff Appraisal Report: Report No. 6464-IN T 1his 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.  IMIDRANDUM OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCrION AND DEVELPMKNT TO THE EEMCUTIVE DISECI0RS CH A PRIPOSED LOAN TO INDIA FOR THE OIL INDIA LIMITED (OIL) PETROLEUM PROJECT 1. The following report on a proposed loan to India for US$140 million is submitted for approval. The proposed loan would be at the standard variable interest rate, with a maturity of 20 years, including a 5-year grace period. The Government of India (GOI) will relend the proceeds of the loan to Oil India Limited (OIL) for a maximum period of 15 years including five years grace and at an interest rate of not less than 15% per annum. G0I will bear the foreign exchange and the interest rate risks. Background 2. Over the past three decades, India has been shifting away from the use of noncommercial fuels, such as fuelwood and vegetable waste, to commercial energy resources. Much of the substitution for noncommercial fuels has been in the form of coal and oil products, reflecting India' s large coal resources, on the one hand, and the rapid grcwth of road transport, on the other, which has almost doubled the use of petroleum products over the past decade. As a result, noncommercial fuels currently account for less than 40% of total energy consumption, while coal accounts for 32%, oil and gas for about 20%, and primary electricity for 8%. 3. Concerned about the adverse impact of energy shortages on economic growth, GOI has nearly doubled the energy sector's share of the public investments between 1973/74 and the present. A substantial portion of these additional resources was used to accelerate the developnent of India's oil and gas resources. Through these efforts, India reduced its reliance on imported oil from 66% in 1973/74 to about 25Z in 1985/86. 4. This increase in oil production has been due to the rapid development of the giant Bombay High offshore field. However, the production from this field, which accounts for two-thirds of current oil production, has now reached its peak and will start to fall by the early 1990's. India's oil output will therefore gradually decline over the next decade unless new reserves are identified and produced. Realizing the large investments required in oil and gas exploration and development, India has encouraged private sector investments to complement its efforts and, over the past seven years, made three exploration acreage offerings to the international oil industry (IOC). The first two offerings solicited very little response; however, the most recent offering (Third Round), launched in May 1986, has solicited twelve bids from seven international companies, for nine of the 27 offshore blocks offered. The bids are presently under evaluation. As part of its ef^rts to conserve and promote efficient use of energy, the Government has maintained average domestic petroleum consumer prices substantially above import costs. 5. Two public sector companies, the Oil and Natural Gas Camission ((NGC) and Oil India Limited, currently undertake petroleum exploration and production activities in India. ONGC had, and will continue to have, the largest involvement in the petroleum sector accounting at present for about 90% of the domestic petroleum exploration and production activities. OIL accounts for the remaining 10% of petroleum exploration and production; it is  - 2 - well managed, and has a small, but highly competent group of technical and management staff. Project Objectives 6. The objectives of the project are to increase production from the partially depleted Assam oil fields (map IBRD No. 19888R); to improve the utilization, and thereby reduce the flaring of associated natural gas; to implement efficient exploration programs in OIL's new petroleum exploration license areas (map IBRD No. 19889), as well as encourage exploration in gas- prone areas; and to strengthen OL's technical and institutional capabilities. Project Description 7. The project comprises: (a) application of production improvement schemes sucih as infill drilling, pressure maintenance, workover of wells and implementation of three enhanced oil recovery (EOR) field pilots in some of the partially depleted oil fields in Assam; (b) implementation of a gas re- injection scheme and associated gas supply network in oil fields in Assam; (c) exploration in OIL's new (and ;as-prone) exploration area in Rajasthan and for deep gas in the Kumchsi area Il of Arunachal Pradesh, involving acquisition and interpretation of high resolution seismic data and drilling of a limited number (about ten) of exploratory wells; and (d) strengthening OIL's technical and institutional capabilities through technical assistance, training and the purchase of equipnent for research and development. The project would be implemented over a period of approximately seven years. The project implenentation arrangements are satisfactory. 8. The total financing required for the project is about US$584 million, of which about US$259 million (44%) will be in foreign exchange. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and disbursements, as well as the disbursement schedule are shown in Schedule B. A timetable of key project processing events, and the status of Bank Group operations in India are given in Schedules C and D, respectively. Two maps (IBRD No. 19888R and IBRD No. 19889) showing the project areas are also attached. The staff appraisal report (Report number 6464-IN) dated February 10, 1987 is being distributed separately. Rationale for Bank Involvement 9. The project is in line with the Bank's objectives for providing support to India's petroleum sector designed to: (a) accelerate development of domestic energy resources as a replacement for oil imports and to relieve energy shortage; (b) encourage an enlarged role of the private sector and mobilize external financing for exploration and development; (c) support the transfer of modern petroleum technology and oil field practices, as well as improve the field operations and technical capabilities of the national oil companies; and (d) promote the efficient use of energy through appropriate pricing policies. I/ The Kumchai area included in this project is in the State of Arunachal Pradesh, part of which is subject of a dispute with China; however, the project area is outside the Chinese claim.  - 3 - 10. During the preparation of this project, the Dank used its contacts with the international oil companies to ascertain their views and concerns about previous efforts by GOI (e.g., the first and second round exploration acreage offerings) to attract IOC's to explore in India. This infomation, coupled with the Bank's experience with exploration promotion efforts by ott1er countries, provided the basis for the Bank's infommal advice to GOI on the terms, conditions, types of acreage, and approach to the IOC's during the third offering. The positive response of the IOC's to the Third Round, at a time when worldwide exploration activities are on a downward trend, reflects the substantial steps taken by GOI to offer competitive tenme and acreages. Through this project, the Bank would also assist OIL at a critical period as it shifts and expands its activities into exploration for gas, as well as in new areas of more complax geology; applies new technologies for increasing oil recovery and the utilization of associated gas; and intensifies its technical training and acquisition of modern technology. Agreed Actions 11. Tn addition to the financing, reporting, auditing, safety as well as enviromaental protection convenants, the following were also agreed with the Goverment and OIL: (a) Frao the Goverment that it will: (i) periodically review the progress of its ongoing study of gas development and utilization options for the gas in Assan with the Bank during the implementation of this project; (ii) fram time to time, carry out a review of the prices of crude oil and natural gas paid to OIL and shall set such prices at a level that will enable OIL to meet its operating expenses and earn a sufficient rate of return on its assets employed in operations, meet its debt service requirements, maintain adequate working capital, and finance a substantial portion of its proposed capital investments; and (iii) the execution of a subsidiary loan agreement between GOI and OIL with terms and conditions satisfactory to the Bank would be a condition of loan effectiveness. (b) From OIL that it will: Ci) use specialized consultants as needed for drilling, well coapletion, production testing and well logging service under the project; (ii) with respect to the exploration components, will not proceed with any major modifications to the agreed well locations and drilling program without giving the Bank a reasonable opportunity to comment on it; (iii) prior to drilling any exploratory well, undertake all the necessary pre-drilling studies and surveys aad then prepare a detailed drilling program including a well casing policy and a preliminary completion program, which will be reviewed with the Bank; (iv) with respect to infill and development wells, OIL shall prepare for each field a well casing policy and a completion program amd take into account Bank's comments on these prior to implementation; and (v) submit annually to the Government a report containing an analysis of its financial situations, including a financial evaluation of the entire project and or any subsequent major investments, which will indicate the level of prices which would be required by OIL to earn reasonable profits and returns on its asseta.  -4- Project Justification and Benefits 12. The project will result in increased domestic production of crude oil, as well as utilization of associated gas that could otherwise be flared, thus reducing the mount of foreign exchange which must be spent on oil imports. The production improvement schemes will yield incremental production of some 20 million tons of oil over the twenty-year project life. The net present value of this incremental oil production is about US$669 million (an ERR of 94%). The net present value of the associated gas re-injection component is estimated at about US$65 million (ERR of about 47%). 13. The enhanced oil recovery (ECR) pilots are not expected to contribute significantly to production but are expected to lead to full scale use of EWR in the 1990s, which would further increase production. The benefits of the exploration component are difficult, at this early stage, to quantify. However, exploration risk analyses show that the estimated expected recoverable gas reserves in the Kumchai area is about 18 billion cubic meters (equivalent to about 15 million tons of oil). In Rajasthan, assuming all the hydrocarbon discovered will be gas, initial estimates of recoverable gas range fran 2 to 42 billion cubic meters. The project will also yield other, unouantifiable benefits, in the form of the strengthened institutional capabilities of Oil India Limited. Project Risks 14. No unusual risks are foreseen and provisions have been made in the design of the project to contain those risks which are nonmally associated with petroleun exploration and development, i. e., geological, technological, and coaercial. Geological ad technological risks will be minimized by using modern seismic technology, drilling a limited number of exploratory wells, introducing qualified and experienced service companies, using adequate technical assistance and training, and following oil industry safety and environmental protection standards. There will be no forest clearance. OL has maintained an excellent safety record in drilling and has exercised prudent reservoir management. A long lasting decline in international oil prices would reduce the economic benefits of the production improvement and gas re-injection schemes. However, based on the low cost of oil ad gas production under the project, the price of oil would have to drop to about US$6.00 per barrel before these major project components became uneconomic. Hence, the economic, technical and environmental risks are considered acceptable. Recommendation 15. I a satisfied that the proposed loan would comply wi th the Articles of Agreement of the Bank and recummend that the Executive Directors approve the proposed loan. Barber C onabl e President Date: February 11, 1987  SMDIIZ A Estimated Project Coa sts (USs Millions) Local ForeiEa Total Production Improvment Schemes 160.6 136.3 296.9 Exploration 34.4 54.3 88.7 Enhanced Oil Recovery 26.8 14.3 41.1 Gas Re-Injection Scheme 17.8 9.1 26.9 Technical Assistance and Training 12.4 9.3 21.7 Base Cost 252.0 223.4 475.3 Physical Contingencies 25.2 22.3 47.5 Price Contingencies 47.6 13.6 61.2 Total Project Cost 324.8 259.2 584.0 Financing Plan Equity OIL 324.8 59.2 384.0 Long Term Debt: IBRD - 140.0 140.0 Cofinancing 2/ - 60.0 60.0 Total Debt - 200.0 200.0 Total Financing 324.8 259.2 584.0 I/ Includes an estimated USM77.4 million in duties and taxes. 21 Including cmercial borrovings and suppliers credits which will be obtained during the course of procuremeat of such itmas as empressrs, well heads, tubulars and accessories.  SCHE9DULE I Page I of 2 Procureent Table (US$ million) Project Mlin.t Proarmet Ibiuid Thtal Cet 1.~~~~~~~ m sedodc, kriIzg A Wall Services 47.6 9.4 8.5.Y 8.8 74.3 (25.3) (25.3) Wall Macerials 6 Cons- bIl 19.1 2.8 6.8 f 4.7 33.4 (10.0) - -(100) -mzrr 66.7 12.2 15.3 13.5 107.7 (35.3) (35-3) 2. Proflctj T mora t Sc&b b NiLLbqg & Tedmical WelU Servimes 55.2 - 64.5 dV 18.7 138.4 (37-1) (37.1) Higs, Rpipmat & Surface Facilities 73.2 32.3 39.7 22.3 167.5 (18.0) (3-1) (21.1) WeUl Materlals & Co'wsiabks - 11.7 38.2 SI 7.7 57.6 (21.2) (21.2) sHuJAmL 128M.4 44.0 142.4 48.7 363.5 (55.1) (24.3) (79.4) 3. Gas IUitifzatimi & nloiet Scheu - 20.8 11.6